'Deflation' Could Threaten Mortgage Portfolios.(Brief Article)

Now that interest rates have edged up and prepayments have slowed, hedging managers can finally take it easy, right?

Not so fast, industry experts warn us. And if Les Parker of Parker & Associates, Broad Run, Va., is correct, hedging might be more important now than ever before.

Globally, Mr. Parker says that the specter of deflation is a real one, not only in Japan but also in Europe. If deflation spreads, that will have an impact on the U.S. economy as well, and will likely drive down mortgage rates, perhaps to levels not seen in recent decades.

In fact, Mr. Parker says that he believes there is a real possibility that 30-year mortgage rates will drop below the 6% threshold this year, notwithstanding the recent run-up in long-term rates that we saw near the end of 2001.

If he's right, and long-term interest rates do fall significantly this year, that could create the "big cajuna" of refinancing waves.

"I'm still in the camp that believes we are in the midst of global deflation. If you have that you are going to end up with significantly lower rates," Mr. Parker said.

Concern about deflation is not widespread among industry economists, but Mr. Parker isn't the only one talking about it. He noted that recent comments by a Federal Reserve Board governor, who discounted the risk of deflation, suggest that the Fed is at least talking about the issue and concerned about it. The prospect of deflation has also been discussed in prominent business publications such as the Wall Street Journal.