Low mortgage rates defy expectations

Fed officials are likely to raise the funds rate to 3.25 percent later this month. Wall Street analysts widely predict that the Fed will keep going, lifting the rate to at least 3.75 percent in coming months. If the Fed pauses after the June meeting, other rates may stall as well.

Fisher's comments touched off a trading frenzy, increasing the already voracious hunger for long-term Treasuries.

Oil-producing countries, for example, have reaped a profit windfall over the past two years as crude prices rose from around $35 a barrel to above $57 a barrel in early April. Oil trading is denominated in dollars, so many producers have parked their profits for the time being in U.S. Treasuries.

The recent downgrading of debt issued by General Motors Corp. and Ford Motor Co. have prompted some investors to move money from corporate bonds to Treasuries, which are considered extremely safe investments because a U.S. government default is so unlikely.

Meanwhile, many hedge funds and traders have bet wrong on a variety of investments this year -- expecting, for example, that GM debt would rise in value or that long-term interest rates would rise. The resulting turmoil in the markets in recent weeks has caused some investors to seek the "safe haven" of Treasuries, analysts said.

The fall in mortgage rates has also caused portfolio problems for some institutions that own mortgage-backed securities. As a result, they have had to buy more long-term securities, causing rates to fall further, said Michael Decker, senior vice president of research and public policy for the Bond Market Association.

Combined with these short-term factors are long-term economic conditions.

Yields are relatively low throughout the industrial world in large part because the Fed and other central banks cut their short-term rates low in response to the 2001 recession and have held them relatively low since then.

Inflation has also been extremely low in recent years.

By raising short-term rates by two full percentage points in the past year, the Fed has assured most investors that inflation is under control, some analysts said.

Low yields on the 10-year Treasury "reflect the general view that growth in prices will remain benign over the coming decade," Decker said.

Much of the demand comes from a global glut of savings relative to investment opportunities, according to Fed board member Ben S. Bernanke. Asian central banks that have trade surpluses with the United States and have pegged their currencies to the dollar, for example, have vast supplies of dollars that they invest in U.S. assets -- including Treasury securities of different durations.

Meanwhile, pension funds and insurers from all over the world have large amounts of retirement savings to invest on behalf of aging populations. Many such investors want to avoid the risks of the stock market or real estate. In some countries, they have recently come under regulatory pressure to match their long-term liabilities with long-term investments -- prompting a shift to bonds with durations of 10 years or more.

The Bush administration in January proposed legislation to bolster pension fund financing. Many fund managers and investors have already started moving money out of stocks and into long-term government bonds in anticipation of the bill's passage in some form, analysts said.

"We see capital flows coming tsunami-style out of Asian central banks and international pension funds located in Europe, the U.S.A. and Asian centers" said Alessandro Giraudo, chief economist of Tradition Ltd., a brokerage firm based in Paris.

Even with the headwinds pushing rates lower, Freddie Mac still forecasts that mortgage rates will rise slowly this year, with the average 30-year fixed rate reaching about 6 percent by year's end, Nothaft said.

Most of the Wall Street analysts consulted by the Bond Market Association also predict that long-term yields, and mortgage rates, will creep up in the months ahead, Decker said.

"They've been saying that for some time, and it hasn't kicked in," he said.

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