Montreal, Canada.

While global stock markets and speculative debt continue to run with the wind since March, the specter of sharply rising long-term interest rates spells big trouble for a still fractured mortgage market.

Mortgage rates are stickier than Treasury bond yields but are influenced by the intermediate curve – and that price action has been bearish since late March. Despite massive amounts of money spent by the Federal Reserve to control longer term rates since last winter the yield on a host of intermediate and long-term Treasury bonds has soared. Already the Fed has purchased $480 billion to mortgage-backed securities and another $130 billion of Treasury bonds.

The Fed’s failure to contain rising long-term interest rates – despite gobs of money thrown at the market – strongly suggests sellers have overwhelmed the central bank.

In a nutshell, the Fed is losing control of the mortgage market.

In the span of just four weeks the 30-year fixed-rate mortgage has climbed to 5.33% from 5.10% -- a significant spike in a short period of time. A spike of just ten basis points (0.10%) has a dramatic effect on financing costs and activity.

The biggest risk to the economy at this stage is housing and mortgage refinancing. Every incremental hike in mortgage rates spells doom for a fragile housing sector that’s still in the midst of the worst price deflation since the 1930s.

The next shoe to drop on the market won’t be a busted bank or a major cyclical company; it might be an acceleration of the housing bear market where prices have crashed more than 30% since peaking in 2006 and still show no signs of stabilizing.

Meanwhile, don’t be bothered chasing this ridiculous bear market rally. The macroeconomic picture might be improving but only temporarily; once government fiscal spending runs dry for this round the dollar and Treasury’s will begin a rapid u-turn that will take many investors to the cleaners -- again.

Stocks, commodities and foreign currencies now dominate the price action over the last 30 days – almost an exact replay of the pre-2007 blow-up. Amazingly, the global economy expanded at more than 3% in 2007 when oil prices were last at $66 a barrel. Yet with the IMF forecasting the worst global recession since WW II in 2009 (-1.3% GDP contraction) oil prices are off to the races and poised to hit $70 soon.

There’s just something wrong with this picture. Watch mortgage rates and Treasury bonds. A potential disaster is quickly unfolding in this segment of credit.