Wednesday, March 01, 2006

Recession talk makes comeback

Bond giant makes 'good case' for real estate slowdown

Mortgage rates are still within a closing-cost argument of 6.25 percent, held stationary by 10-year T-notes locked in trading between 4.5 percent and 4.6 percent.

The bond market is in a total standoff: fears of an overheating economy and energy-pushed inflation are matched by belief that a rapidly cooling housing market will slow the economy. In the slowdown equation, it doesn't matter how high the Fed pushes short-term rates; the farther it does, the quicker and more the economy will slow, and the more money that owners of bonds will make in the slowdown.

Fed Chairman Ben Bernanke says GDP growth this year and next will be in the 3.5 percent range. If so, with unemployment low and falling, energy price pressure still high, a 5 percent Fed funds rate (up from 4.5 percent today) would be the soul of prudence. PIMCO, the giant of bond-market mutual funds, fee-fie-foe-fums that GDP will slow to 2 percent before the end of 2006. If the economy is in the early stages of that slowdown, then 5 percent Fed funds would be an even-money recession bet.

Read the entire Lou Barnes article at Citywide Services.

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