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Flash back to June 30, 2004. The Fed Funds Rate was 1.000%.
June 30, 2004 was the date of the first of 17 consecutive increases to the Fed Fund Rate. At the time, the 10-year treasury note was yielding 4.59%.
Today, with the FFR standing at 5.250%, the 10-year treasury is yielding 4.42% -- a drop of 17 basis points.
The FFR is the ultimate short-term interest rate; it's the cost to borrow money overnight, risk-free between banks. The 10-year treasury, on the other hand, is longer-term. In fact, it's like 10 consecutive years of overnight rates. It's also considered to be risk-free.
Because the 10-year note is lower than the overnight rate, we can infer that markets believe the cost of overnight money will decrease over time, averaging 4.42% over 10 years.
Markets are already predicting with 60% probability that the FFR will be lower in March 2007 than it is today.
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator call 513-443-2020.
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