Greenspan Faces Jilted Treasury Market

"He wants to see the economy do better, but he just locked the refi door," Bianco said, suggesting higher bond yields will curtail recent record-setting demand for mortgage refinancing.

As discussed in Greenspan's prepared testimony, this is no small matter. Estimated mortgage refinancings, net of cash-outs, exceeded $1.6 trillion in 2002, Greenspan noted. And refinancing activity accelerated from that record pace in the first half of 2003 as rates fell further still -- until very recently that is.

"Households have taken advantage of new lows in mortgage interest rates to refinance debt on more favorable terms, to lengthen debt maturity, and, in many cases, to extract equity from their homes to pay down other higher-cost debt," Greenspan said. "Debt service burdens, accordingly, have declined."

Higher mortgage rates will clearly curtail refinancing activity and also diminish the affordability of home purchases. Either development threatens to undermine strength in the housing sector, which provided a huge boost to overall household wealth in recent years, thus helping consumer spending stay strong despite rising unemployment and sluggish overall growth. Tuesday's stronger-than-expected June retail sales report was the latest evidence of this trend.

On a separate but related note, the S&P Homebuilding Index fell 4.5% Tuesday amid big percentage declines by components such as D.R. Horton (DHI Quote - Cramer on DHI - Stock Picks) and K.B. Home (KBH Quote - Cramer on KBH - Stock Picks). One wonders if this latest backup in bond yields -- and selloff in housing stocks -- will make Berkshire Hathaway's(BRKA Quote - Cramer on BRKA - Stock Picks) $12.50 per share offer more appealing to shareholders of Clayton Homes (CMH Quote - Cramer on CMH - Stock Picks). Several institutions, including Brandywine Asset Management, have expressed opposition to Berkshire's bid; a vote on the offer is scheduled for Wednesday.

Something Borrowed, Something Blue

"What the bond market has essentially done is taken all [Greenspan's] work -- the eases and monetary stimulus -- and canceled it by raising interest rates," Bianco continued. Although bond yields remain low by historic standards, "the bond market has no margin for error," he said. "He's got to talk to the bond guys [Wednesday] and tell them 'my policy is not antibond, won't produce inflation and you guys can start buying bonds again.'"

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