I’m stepping out a bit here.I was an economics major in college, but I’m more comfortable reading the charts.That being said, I think the credit markets are at an inflection point; recent activity could end up affecting the economy for some time

The Treasury market has tanked in the past weeks.On the long end, rates have been backing up for much of this year on forecasts for an improved economy later this year (below is a daily chart of 10 Year T Note yields).This selloff gained traction after the last FOMC meeting; in that statement they did not emphasize buying the long end to keep rates down.The potential downgrade of UK sovereign debt was the last straw for Treasuries; the US isn’t the UK, but that thought is out there now.

What's the trend here?

What’s the trend here?

Mortgage rates had been trying to remain steady for the past months-there had been no big jump in housing sales to pressure mortgage rates.The effect of this was  to push the spread between mortgage and 1o year rates to historic levels, and the dam finally broke yesterday.The chart below shows the past two day’s action in 30 year mortgage rates; they have risen 50 bp in two days (thanks to Zero Hedge for pointing this out:http://zerohedge.blogspot.com/2009/05/mortgage-tankage-accelerates.html ).For more as to what was behind this implosion, read here:http://globaleconomicanalysis.blogspot.com/2009/05/mortgage-market-locks-up.html

What an implosion looks like.

What an implosion looks like.

What am I getting at here?For starters, it strains credulity to think that the housing market can take this. Housing is fragile (to say the least), a seized up mortgage market is going to be a real headwind.Combine higher interest rates and weak housing (see the latest Case/Shiller report) along with a big jump in energy price (wholesale gas prices up 80 cents or about 70% this year) and you’ve got some real problems for an economic recovery.I studied economics at The University of Chicago, home of monetarism.One of monetarism’s tenets is that “Public sector borrowing crowds out private sector borrowing”.To a large degree the US has avoided this problem throughout its history; have things now gotten squeezed to the point that it’s unavoidable?We’ll see.

www.FeedBurner.com) Interest Rates, Housing and the Economy.

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