FRIDAY, 18 May 2007

We were unable to post on our blogs on Friday. That did not stop the market from moving dramatically. The 10-year Treasury closed at 4.804% which was +.048% from Thursday’s close. Rates were driven by a higher than anticipated Michigan Consumer Sentiment Report. Economists were expecting the Michigan Consumer Sentiment Report to be 84.8 to 87.0. The University of Michigan reported that the mood of consumers had improved with their index at 88.7.

TODAY

Rates are mostly flat as we start the week out. There is no data out today, only some short term treasury auctions. The 10-year Treasury is -.006% with the yield at 4.798%.

MID-TERM OUTLOOK [14 May 2007]

There may be a few problems for rates for this quarter.

1.) The housing bubble has ‘burst’. The question is, will housing continue to decline? Is it flattening? Or, is it on the verge of a rebound? The data over the last few months has been a resounding maybe to all three. IF homeowners start to see a rebound in housing their confidence will increase. As confidence increases, so will spending. Economic growth is moderate now with problematic inflation. Strong growth could renew strong inflation.

On 08 May 2007 the bond market responded to an unscheduled announcement by the National Association of Realtors (NAR). The NAR reduced its sales forecasts for 2007 and 2008, predicting that stricter lending standards would limit home buying. That only makes sense as stricter guidelines reduce the number of buyers able to get a mortgage. Given the already oversupply of houses, verses the very number of buyers we have a buyers market now. Reducing the number of buyers hits the real estate market with a double whammy.

Sales of existing homes will probably fall about 3% this year to 6.29 million from 6.48 million in 2006. Sales of new homes are projected to fall about 18% to 864,000, compared with a 14% drop predicted last month. Housing starts are expected to drop 19% to 1.46 million.

When there are signs of housing market weakness it helps the price of bonds. Since it is a sing of a slowing economy it instills safe-haven interest.

2.) IF investors continue to be concerned with the FED’s ability to fight inflation. The confusion of the last FOMC meeting on 21 March, and the subsequent release of the Minutes on 11 April, caused the bond market to issue a collective HUH?!?! Economists and FED watchers echoed the HUH!?!, and added a wha...?.

3.) In February we wrote:

We have one great inflation fear in the mid-term; corn prices. With all the talk of alternate fuel and ethanol, corn futures have nearly doubled. That will impact not just corn flakes, but pop/soda, beef, and pig, just about anything we eat.

None other than the Western Hemispheres worse dictators agrees with us. (For once

He understands economics.)

An open letter signed by Cuban leader Fidel Castro, titled "More Than 3 Billion People in the World Condemned to Premature Death from Hunger and Thirst," circulated in the media Thursday, 05 April 2007. In his first major statement in months, Castro rejects the use of crops for biofuel production. …he is concerned that President Bush and the US Auto Makers enthusiasm for flexfuel vehicles will have disastrous environmental and food-price consequences for developing countries.

Castro and his ally, Venezuelan President Hugo Chavez, probably are concerned that the Brazilian-U.S. ethanol initiative, launched during Bush's recent Latin American tour, threatens Venezuela's influence in Central American and Caribbean countries through its subsidized oil Petrocaribe initiative.

Steve Boxmeyer [612] 799 – 6858
steve@LendWithIntegrity.com