Tuesday, November 29, 2005

Treasuries and Real Estate Data

The way that the treasury market reacts to the housing data that comes out leads me to believe that the bubble will deflate over a long period (18 to 24 months) rather than pop in one or two specific periods in the near term. If you watch the treasury bond market you'll notice that it (prices) rallies on negative housing news and falls on positive housing news. This is because the market belives that if the housing market is defalting, then the Fed will stop increasing interest rates. Conversely, the market believes that if the housing bubble keeps inflating, then the Fed will keep raing interest rates.

The cycle feeds on itself though. Fed raises rates, housing bubble deflates a little. The Fed, happy that housing is deflating, does not raise rates causing mortage rates to fall and housing demand to increase agin. Repeat.

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