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Bernanke Remarks Promise No Action, Send Yields Falling

Delivering highly anticipated remarks in Wyoming Thursday, ""Federal Reserve"":http://www.federalreserve.gov/ Chairman Ben Bernanke promised no new stimulus measures, opting instead to offer an optimistic view of fundamental strength of the economy, coupled with a blistering critique of fiscal management by policymakers and an overview of the housing sector. In response to his ""speech"":http://www.federalreserve.gov/newsevents/speech/bernanke20110826a.htm, Treasury bonds rose, forcing a downward shift in yields and likely mortgage rates for next week.

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The remarks come on the heels of the Fed's nearly split decision to keep interest rates at historic lows until 2013, which followed zigzagging starts and crashes in the stock market over August.

Bernanke delineated the housing industry as one in particular that keeps an economic rebound from moving forward.

He cited an ""overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines"" as reasons why rates for new home construction, a driver of both job creation and the housing recovery, remain at steep lows.

""The low level of construction has implications not only for builders but for providers of a wide range of goods and services related to housing and homebuilding,"" the Fed chief said.

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He added, ""Even as tight credit for some borrowers has been one of the factors restraining housing recovery, the weakness of the housing sector has in turn had adverse effects on financial markets and on the flow of credit.""

The Fed chief wasn't far off-mark with his comments. The ""Commerce Department"":http://www.commerce.gov/ reported a 1.5-percent decline in home construction over July from June, marking a seasonally adjusted annual rate of 604,000 homes over that month. Stock markets also wobbled over the same month with the release of figures for existing-home sales by the ""National Association of Realtors"":http://www.realtor.org/, which found single-family, townhomes, and condos receding by 3.5 percent to a seasonally adjusted 4.67-million annual rate in July, a change from 4.84 million in June.

These conditions perpetuate delinquencies and foreclosures, which in turn apply financial pressure to ""financial institutions and households,"" contributing ""to greater caution in the extension of credit and to slower growth in consumer spending.""

According to a bond trader prices service with ""_Bloomberg News_"":http://www.bloomberg.com/news/2011-08-26/treasuries-increase-as-fed-s-bernanke-fails-to-signal-additional-stimulus.html, the 10-year Treasury yield fell on news that Bernanke would hold off on any further action, dropping to 2.17 percent Thursday morning while 2.125 percent securities matured doubled by a half.

""We're reacting to what's not in the speech,"" _Bloomberg _ quoted Kevin Flanagan, a fixed-income strategist with ""Morgan Stanley Smith Barney"":http://www.morganstanley.com/, as saying. ""He took the least controversial option and that's to reiterate the outcome of the August Federal Open Market Committee meeting.""

Seemingly also in response, the five-year Treasury yield fell from 1.05 to 0.98, alongside a 1.62-to-1.57-plunge for the seven-year yield and a 3.23-to-3.17 downward shift for the 20-year yield.

With mortgage rates benchmarked against Treasury yields, the new lows likely signal a drop for loan rates. Despite modest upticks, according to ""Freddie Mac"":http://www.freddiemac.com/, both the mortgage giant and ""Bankrate"":http://www.bankrate.com/ still ""reported"":https://themreport.com/articles/mortgage-rates-post-mixed-results-2011-08-25 rates at historic bottoms this week.

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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