Thrift executives watched this week's bond rally with sinking hearts.

Every basis-point drop in long rates makes it more likely that thrift portfolios, dominated by adjustable-rate mortgages, will hemorrhage as homeowners with adjustables refinance into cheap fixed-rate loans.

Even more worrisome to many thrift executives is the yield curve, which is almost flat as short-term rates hold steady in the face of plunging long-term rates. On Wednesday, the 30-year bond ended at 5.78%, and the one-year Treasury ended at 5.29%.

That puts adjustables, which are linked to short-term rates, at a growing disadvantage to fixed-rate loans, whose rates are linked to longer- term bonds.

"The steepness of the yield curve is the primary determinant of our ability to originate ARMs," said Charles John Koch, chairman of Charter One Financial, Cleveland. "We're working our way into an inverted yield curve.

"It's a hostile environment but it's not the end of the world," he added. "This too will pass."

At Charter One, about 75% of home loans are fixed-rate and the rest are adjustables, Mr. Koch said. With one-year Treasury-based adjustable-rate mortgages starting at 5.69% and 30-year mortgages at 6.99%, according to HSH Associates, Butler, N.J., consumers don't have enough incentive to opt for the lower initial payments on ARMs.

At the other end of the country, Washington Federal Savings, Seattle, is also eyeing falling rates warily. Washington Federal is unusual among thrifts in that it holds fixed-rate loans.

About 55% of Washington Federal's $4.2 billion loan portfolio consists of loans that were either originated since the refinancing boom of 1993 and 1994 or pre-existing loans that were not refinanced during that boom. They are considered vulnerable to refinancing because they carry relatively high rates.

As a fixed-rate lender, Washington Federal would appear to have an advantage over thrifts that specialize in adjustables.

Still, chairman Guy C. Pinkerton said that although the thrift wants to keep its customers, it doesn't want to lock in today's low rates for long durations. He said Washington Federal plans to offer a competing product-a two-year fixed-rate loan that carries rates lower than the current 7% on 30-year loans. Homeowners can refinance into fixed or adjustable loans after two years, he said.

"We would be taking less income for two years," Mr. Pinkerton said. In exchange, the thrift can postpone the painful step of locking in long-term low rates for another two years, he said.

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