6/1/09-Bonds Free Fall, Rates Climb - from Fred Holland

Good morning. What a week it was! On Wednesday, we saw a significant move lower for bonds and then a substantial increase on Friday. Stocks are climbing this morning which is putting added pressure on the bond market. Although higher rates may dampen the housing recovery, if one is indeed occurring, we should remember that rates are only part of the “home buying equation”. Many houses are now more affordable, families are saving money now and may have more for a down payment, and rates are still low. Complicating things is the fact that U.S. bond markets are not trading naturally due to the massive intervention by the Fed. The Fed has been buying mortgage-backed securities to keep mortgage rates low, which has reduced the spread between the Treasury bonds and mortgages unnaturally. But with a steady rise in 10-year Treasury yields, the rates on mortgages can no longer escape the Treasury market, and as we saw last week mortgage rates shot up.

For economic news it is a busy week. We have already had GM filing for bankruptcy, Personal Income and Consumption (consumer spending fell in April by .1% despite personal income posting the largest increase in 11 months, up .5%), and later this morning we will have Construction Spending and the ISM Index. Tomorrow we take a break, but Wednesday we resume with Factory Orders and the ISM Services index. On Thursday we have Jobless Claims and Productivity, and then on Friday the slew of employment data. It will be another interesting week. Stay tuned and let me know if you have any questions.

Fred

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Provided to you Exclusively
By
Fred W. Holland
”Committed to Helping Attain Your Goals.”

Fred W. Holland Mountain View Mortgage, Inc. 22020 17th Ave SE #220 Bothell, WA 98021 Office: 425-821-9028 E-Mail: mvmfh@msn.com Website: www.mountainviewmortgage.com



For the week of Jun 01, 2009 --- Vol. 7, Issue 22



Last Week in Review


"I'M FREE...FREE FALLIN'." Tom Petty. And a free fall indeed was the case last Wednesday, as Bonds had their worst one-day performance since last October, losing an astounding 206bp. So what caused this free fall...and what helped Bonds and home loan rates rally back and improve later in the week? Here's what you need to know.
The main culprit for Wednesday's sell off was supply. The Treasury auctions and the increased number of refinance transactions closing have added hundreds of Billions of dollars of new Bond supply to the market. Economics 101 tells us that anytime supply vastly exceeds demand, prices will move lower, and that's exactly what we saw last week...and as Bond prices move lower, home loan rates move higher. And the trend isn't likely to end anytime soon, as the Treasury will have to continue to pump out major supply of Bonds, in order to pay for the massive government stimulus plans...and the Fed buying plan simply won't be enough to balance out supply and demand - it's like trying to sop up a flood with a sponge. Bottom line - rates are likely on the rise, but still near historic lows. Let's talk and make sure you have taken necessary actions for your own financial situation.
Yet the news wasn't all doom and gloom - as both the Dow and S&P 500 have seen three months of positive gains for the first time in over a year! And the National Association for Business Economics (NABE) said that the end of the recession is in sight, noting that, "While the overall tone remains soft, there are emerging signs that the economy is stabilizing." The Commerce Department's report that Gross Domestic Product for the first quarter fell at an annual rate of 5.7% was better than initial estimates, also indicating that the recession may be slowing down and turning more moderate. Important reminder: An improvement in the economy will likely push rates higher over time, which is why it's important to take action during this opportunity of low rates.
In other news, Initial Jobless Claims were better than expectations, but a higher revision to the prior week's reading offset the slightly positive headline number. Durable Goods Orders in April also came in a bit better than expectations. On the housing front, while New Home Sales were just under estimates, Existing Home Sales came in higher than expectations. These reports didn't impact the markets a great deal last week, as the impact from all the extra supply was the real mover and shaker.
Bonds were able to regain some ground Thursday and Friday after their steep free fall on Wednesday, but even with the improvement, home loan rates ended the week .25% to .375% worse than where they began.
READY TO CLEAN OUT SOME OLD CLUTTER AND GAIN SOME EXTRA CASH? IF YOU'VE BEEN THINKING ABOUT HOLDING A YARD SALE THIS SUMMER, CHECK OUT THIS WEEK'S MORTGAGE MARKET VIEW FOR GREAT TIPS THAT WILL HELP YOUR SALE SOAR TO SUCCESS.

Forecast for the Week


There will be big economic reports to bookend the week ahead, starting with Monday bringing the Fed's favorite gauge of inflation, the Core Personal Consumption Expenditure (PCE) index, which is found within the Personal Income Report. Remember, inflation is the archenemy of Bonds and home loan rates, and if this report shows inflation is on the rise, it could dampen the improvement that Bonds and home loan rates mustered up on Friday.
To end the week, Friday will bring the always important Jobs Report. Last month's report showed that there were 539,000 jobs lost in April versus expectations of a 610,000 loss, representing the smallest job loss since October. Even though the Unemployment Rate moved higher and hit a 26-year high of 8.9% in April, this is a lagging indicator, and many other data points have hinted that the worst could be over for the job market. It will be important to see if the most recent numbers continue to move in that direction.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bond prices and home loan rates were able to end the week on an improving trend after record supply caused them to worsen dramatically midweek. I will be watching closely to see if Bonds can continue to climb their way out of last week's free fall.
Chart: Fannie Mae 4.0% Mortgage Bond (Friday May 29, 2009)

The Mortgage Market View...


Not All Yard Sales Are Created Equal
Summer is one of the most popular seasons for holding a yard sale. But simply holding a yard sale doesn't necessarily mean you'll end the day with lots of extra money in your pocket. If you're planning on clearing out your clutter this summer, here are ten tips to help make your yard sale a success:
Start your yard sale earlier than other yard sales in your area so shoppers will start their shopping day with you.
Don't schedule your yard sale on a holiday weekend or during a big event in your area (like a sporting event or festival).
If it rains, take down your signs and reschedule your sale so you can maximize traffic on the day of your sale.
Before your own yard sale, visit other sales in your neighborhood to get an idea of typical prices.
Place all of your items (except for large items) on tables so shoppers don't have to bend.
If you plan to sell electrical items, have an outlet and extension cord handy so you can show shoppers that the items work.
If you want to sell larger ticket items, look for those items in a local circular and then attach the ad to your item so shoppers can see that they are getting a great deal.
If you have a variety of items that men would like, place them on their own table. If married couples stop by your sale, both parties will enjoy looking.
Advertise your sale ahead of time in your local newspaper classified section, on community boards at your local food stores, and online at places like www.Craigslist.org.
Wait until the morning of your garage sale to hang signs in your neighborhood, and make sure you take them down that day to avoid any fines from your homeowner's association or your town. You don't want to have to use all the cash you earn to pay a fine!
And remember, a successful sale is also a safe sale. Keep money in a pouch around your waist instead of in a cash box (which could get stolen while you are helping shoppers), don't accept checks (which could bounce), and never allow strangers inside your home to use the bathroom or telephone.
Follow these tips, and you'll be well on your way to having less clutter in your home, and more cash in your pocket!

The Week's Economic Indicator Calendar


Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.
Economic Calendar for the Week of June 01 - June 05
Date
ET
Economic Report
For
Estimate
Actual
Prior
Impact
Mon. June 01
08:30
Personal Income
Apr
-0.2%

-0.3%
Moderate
Mon. June 01
08:30
Personal Spending
Apr
-0.2%

-0.2%
Moderate
Mon. June 01
08:30
Personal Consumption Expenditures and Core PCE
Apr
NA

0.2%
HIGH
Mon. June 01
08:30
Personal Consumption Expenditures and Core PCE
YOY
NA

1.8%
HIGH
Mon. June 01
10:00
ISM Index
May
42.0

40.1
HIGH
Wed. June 03
10:30
Crude Inventories
5/29
NA

-5.41M
Moderate
Wed. June 03
10:00
ISM Services Index
May
45.0

43.7
Moderate
Thu. June 04
08:30
Jobless Claims (Initial)
5/30
NA

623K
Moderate
Thu. June 04
08:30
Productivity
Q1
1.2%

0.8%
Moderate
Fri. June 05
08:30
Average Work Week
May
33.2

33.2
HIGH
Fri. June 05
08:30
Hourly Earnings
May
0.2%

0.1%
HIGH
Fri. June 05
08:30
Non-farm Payrolls
May
-550K

-539K
HIGH
Fri. June 05
08:30
Unemployment Rate
May
9.2%

8.9%
HIGH


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