Tuesday, March 2, 2010

Who Would You Lend To?

The following chart shows the spread between 30 year mortgage bonds and 30 year treasury bonds.  The spread means the difference between the two.

Imagine you have $400,000 to invest today.  You have two options.  They both will make interest payments to you every month for 30 years. 

1. Lend an American home buyer $400,000 that they can use to buy a house.

2. Lend the government $400,000

At today's rates you will recieve only .5% more in interest by lending to a home owner vs. lending to the Federal Government.

Can you see how artificially low mortgage rates have been suppressed by the Federal Reserve buying?

No intelligent person would lend to a risky home owner vs. lending to the government for a difference of .5%.

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