Markets Await Word From TheFed

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WASHINGTON - (06/19/06) – Yields on two-year Treasurynotes rose to a five-and-a-half-year high Friday as the financialmarkets braced for another hike in short-term rates when theFederal Reserve’s Open Market Committee meets later thismonth. The Fed is widely expected to raise the target rate forovernight funds for the 17th consecutive time by 25 basis points,to 5.25%. “I think they’re going to go another25,” said one credit union economist watching the market. TheFed’s pressure has caused an inverted yield curve, all buteliminating spreads between long-term and short-term rates, andstifling any short-term lending. For six of the past eight weeks,yields on two-year Treasuries have exceeded yields on 10-yearissues. In the mortgage market, rates on five-year ARMs were almostidentical to 15-year fixed-rate loans last week, according toFreddie Mac. And the difference between a 30-year mortgage and aone-year ARM had narrowed to less than 1%. As a result, loansclosely tied to short-term rates, like adjustable rate mortgages,home equity and used car loans, all declined among credit unions inApril, according to CUNA. In fact, ARMs and home equity loans haveshown negative growth for the first four months of 2006, CUNAreported. The financial markets are worried, the credit unioneconomist said, because an inverted yield curve has preceded eachof the past four U.S. recessions.

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