A yield of 3.1 % on the 30 year gov bonds corresponds to what kind of mortgage rate? And what kind of impact on housing?

Michael Cohn writes: 

I am not near terminals, but I would guess that the 30 year rate is set by the marketing department over the appropriate tsy, but every mortgage analysis I see that includes the TBA product uses 2-10 year swaps and treasuries to hedge the production. The option adjusted simulations give mtg durations way far below the stated maturity. Of course this duration extends as rates generally rise–the dreaded Negative convexity….

Victor Niederhoffer adds:

If the 10 year rate is 2% and the 30 year rate is 3.1%, then the average 10 year rate starting in 10 years must be (93 - 20) /20 = 3.6%. Looks like a bust in housing somewhere the far side of the world of 10 years.

Anatoly Veltman comments:

I'm wondering whether this can even be arbitraged away. It's always surprising to me how commodity deliveries are NOT, despite very obvious math, only a month or two, or a year forward.

I'm floored by the chair's ability (or eagerness) to predict any economic development 10 years hence. We've been on unprecedented path ever since ZIRP ensued. Both the political and economic moves should be viewed as completely unpredictable, if not random, that far out.

Richard Owen comments:

Is the perpetual commodities gap down to commercials being a 600lb gorilla? Particularly sovereign-backed commercials? They will smash open a small arb by being price insensitive, thus making the basis too painful to hold as it widens? Or rather, the basis is too uninteresting to hold if you do it in a size that will leave you safe upon arrival of gorillas?

Is the Chair's maths based on a risk-neutral expectation? ie., the current superlong end of the curve is a good estimate of the future long end of the curve? Which often does not work out that way? [I was trying to figure the formula you are using at the end - which one is it?]

Some of the back and forth over past days has had me thinking about science vs. mumbo. Science matters. But if at least one has a grounding in science, does that justify occasional "mumbo"? ie., We can allow the Chair his gut?

Kasparov knew his science cold: his brilliance was knowing when that grounding told him something in his gut, out of his range of proof, and to act upon it: Quoth Gary:

"Oh it [intuiton] does exist! It's the most valuable quality of a human being in my view. […] You have to learn how to trust your intuition. My view is we severely undermine the importance of intuition, because intuition involves taking too much risk. Whether we like it or not we live in a risk averse culture and intuitive decisions very often cannot be explained in the terms that should be required by corporate culture or by other family members. By adding this core of intuition to the decision making process, we can dramatically improve the results."

Or does Taleb apply, and we should all get back into bed, beneath the covers, as anything more impressive achieved during the day is luck?



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