There is no economic data out today, only a few auctions. The first auction today was the 4-week Treasury Bill. It had apparently no affect on the benchmark 10-year Treasury.

The 10-year Treasury opened with rates moving much lower. At one point the rate on the 10-year Treasury was 5.133% which was -.038% lower than Friday’s close. Rates did change direction and at one point the 10-year Treasury was 5.188%; up .017% from Friday’s close, and +.055% in intra-day trading.

The 10-year Treasury has fluctuated from -.005% to +.010% since the bond market opened. At mid-day trading the 10-year treasury is at -.002% with the rate at 5.169%. While it is hard to say, it does seem that volume is active.

The Housing Market Index is published at 12:00cdt {17:00gmt}. It has only rarely been noticed by the bond market. This blog will post on this at a later time.

TOMORROW, 19 June 007.

The only item out is the Housing Starts and Building Permits. Historically, both have been viewed lightly by traders. That has changed recently as economists and analysts are trying to gauge the health of the housing sector.

Housing Starts are expected to be 1470k to 1490k’ that is lower than last month’s 1528k. Building Permits are mostly forecast to be higher than last month’s 1457. Predictions range from 1450 to 1480

SHORT-TERM OUTLOOK [18 June 2007]

The week will be a quiet one in terms of economic data. Friday actually has none. The week will be a good chance to test the new direction of Investor Sentiment. Until the last few days, the investor sentiment has appeared to be in the direction for raising rates. We have seen some reversal of about .100% on the 10-year Treasury.

A week with little data can give us a chance to see if that will hold.

MID-TERM OUTLOOK [18 June 2007]

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

1.) Investor sentiment leans towards higher rates. The bond market has been in a selling mood since 10 May 2007

A few months back this blog wrote that the bond market seemed to be looking for any excuse to buy bonds and thus drive rates lower. That trend has reversed itself. The bond market is now looking for any reason to sell, and correspondingly raise rates.

On 31 May 2007 there was one such example. There were six items published that day. Even though most of the economic items came in as expected, three did not. Of the three, two were lower than expected and should have moved rates lower. Instead rates continued their upward trend. Clearly, investor sentiment has turned bearish on buying bonds.

Investors are becoming bearish and are starting to realize that inflation exists. They are starting to see that the FED is more determined fight inflation. More and more FED officials are making hawkish comments.

2) The housing bubble has ‘burst’. 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.

The slide in Real estate has not yet seemed to affect retail sales or consumer confidence. Inflation hawks can’t win for losing.

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 current oversupply of houses, verses the very number of buyers we have a buyers market now as it is. 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.

3) The US and the global economy appear to in recovery. This has to be the shortest, least felt ‘recession ever experienced. (The 2.2% main stream media aside, there never was a recession; GDP never went below 0.0 %.)

A major part of the growing global economy is China. On 12 June, the Chinese consumer price index for May was +3.4% in year-to-year analysis, according to data published by the [Chinese] National Bureau of Statistics. Most of the gains were due to food prices, and haven't spread to a broad range of consumer goods. What we would call Chinese core-CPI was +1.0%. China’s food prices jumped 8.3% from a year ago.

Even though Chinese core-CPI was low, the headline inflation rate is now higher than the interest rate banks pay on deposits, currently set at 3.06% for one year. That gives Chinese consumers a big incentive to spend or invest that money rather than let it sit in the bank.

Further, and of great Long-Term bearing on US interest rates – is how this will diminish demand for US Treasuries. When demand for any commodity decreases, the price also declines. When bond prices deteriorate as they have, rates go up.

4) In February this blog 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. Corn is a staple of many food products that we eat. Increases in corn prices will not just impact corn flakes, but pop/soda, beef, and pig, chicken, candy bars, just about anything we eat.”

Grain stockpiles in many countries have fallen to multiyear lows, even as increased production of biofuels such as ethanol has added a new source of demand.

Even the best estimates of corn based fuel say that it will never replace the need for fossil fuels. At best it can only reduce the demand some. It would be much better for us to reduce our demand on foreign oil and decrease the price at the pump by; 1.) Drilling where we know that there is oil, 2.) Build refineries, 3.) Eat food as food.

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