Mortgage Markets Are Out of Control (via the Mises blog)....

Why are rates rising while the Fed attempts to keep them down, according to this article it is the mamoth mortgage market.

Mortgage-backed securities respond violently to moves in interest rates. When rates fall and homeowners refinance, some of the mortgages in large portfolios held by banks, hedge funds and mortgage originators are cashed in. That requires the managers of these portfolios to rebalance their hedges by buying Treasuries. Such buying helped push interest rates down to ridiculous levels earlier this year.

When rates rise, refinancings drop, and the average life of a mortgage grows. That forces traders to rebalance portfolios by selling Treasuries. Selling begets selling; interest rates spike.

Last week, the Federal Reserve rattled the bond market by promising to keep rates low for as long as possible. Traders feared that the accommodative stance could be inflationary. They sold Treasuries, and rates rose.

Here is Robert Blumen's, from the Mises Blog, take on the problem...

Hedging is an attempt to insure themselves against interest rate movements. The problem here is that at this point the GSEs are so large that they are the market. Insurance is based on the pooling of a large number of independent risks. As we are seeing here, the entire system cannot insure itself against the failure of the entire system.