Being in the mortgage business, I do my best to keep informed of the myriad of opinions from all the economic gurus in the media. When Fed Chairman Alan Greenspan and his merry band of policy makers decided to engage in a campaign of "measured" rate hikes last June, most, if not all, economic talking heads were predicting higher mortgage rates in 2005.

It's no surprise that short term mortgage rates have shot up. The Fed controls the federal funds rate and other short term rates will follow suit, including adjustable rate mortgages. But long term rates have caught everyone by surprise. Let's take a look at the ten year treasury bond, a good benchmark of long term mortgage rates.

On June 30, 2004, the Fed bumped the fed funds rate by 25 basis points, to 1.25 percent. Two days before the move, on June 28, the ten year treasury bond was yielding 4.76 percent. Two days after the move, on July 2, the ten year rate dropped to 4.48 percent.

Let's compare the fed funds rate with the ten year treasury at each Fed move:

While Greenspan has tripled the federal funds rate, long term treasuries have barely moved. This "flattening" of the yield curve means that long term rates become a better deal than adjustables.

What if this trend continues? If Greenspan keeps pushing up short term rates and the market continues to keep long term rates down, we will soon have an inverted yield curve, when short term rates are higher than long term rates.

Logically, such a scenario shouldn't happen. Lenders normally would demand a higher return on their money if they are going to guarantee a particular interest rate for a longer period of time because their money is tied up longer.

I did some poking around on the internet and found some interesting historical data. In March of 1989, the average yield on the one year Treasury bill increased to 9.57 percent. During the same month, the yield on the ten year note was hovering around 9.36 percent.

For the folks who are old enough to remember, 1989 was near the beginning of a recession. Housing faltered and real estate prices dropped in many areas. Home values remained fairly flat for years to come.

Then, in 1999 and 2000, the potential for inflation reared its head once again. Chairman Greenspan responded by raising short term rates six times. During most of 2000, yields on short term maturities exceeded those on longer maturities.

Following both of these periods of an inverted yield curve came a recession, by most economic definitions.

How does this relate to the economy today? Well, I'm certainly not predicting that a recession or even an inverted yield curve is on the horizon. But the spread between short term and long term rates continues to flatten.

Let's fast forward to recent data. As of the end of April, the average yield on the one year Treasury bill was hovering at about 3.34 percent. The ten year note was yielding about 4.20 percent. We're less than one percent away from a flat yield curve. Will it flip? Who knows? Stay tuned.

Published: May 24, 2005

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.