{11:14cdt, 16:41gmt}

Rates are much better this morning as the bond market is experiencing a buying spree. The activity is not based on any of the economic data out at this time. The price on the 10-year Treasury is at 95&20/32nds which is +19/32nds over yesterday. The important thing for our readers is the rate; which always trades in the opposite direction from price. The yield on the 10-year Treasury is 5.071%, -.088% from Monday.

Wholesale Inventories may have caused a very small amount of the bond boom, but not nearly the amount we have this morning. They were predicted to be +0.3% to +0.4%, at or a bit higher than last months +0.3%. The actual number was +0.5%. This is in inverse indicator; a higher number is bad for the economy. Bad for the economy = good for rates. Even so, this little bit off target does not account for the impressive gains in the bond market.

The bond market completely ignored yesterday's Consumer Credit. It was anticipated to be +$5.6B to +$7.0B. Consumers borrowed +$12.9B in May. This should have caused bond investors to be concerned with increased demand for lending money, and thus increased rates.

This mornings price (and rate) on the bond market has been driven after Standard & Poor's said it may cut credit ratings on $12 billion of bonds backed by subprime mortgages. This raises concern among investors that the housing weakness may slow the U.S. economy.

An article in Bloomberg by Deborah Finestone and Daniel Kruger said this:  “The fear over subprime issues is huge,'' said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort, one of the 21 primary security dealers that trade with the Federal Reserve. ``Every time credit spreads go up, people buy Treasuries.''

Yet to come today: FED Chair Ben Bernanke delivers an address on inflation today around noon. Given the topic, and who is giving the speech, and the market’s questions on the FED’s views of the topic, it will have an impact on interest rates, it could turn the direction of rates. There will be comment on this in a post this evening.

SHORT-TERM OUTLOOK

Wednesday has few items and the bond market will possibly make some adjustments from Tuesday. The early morning sees the release of the Mortgage Bankers Association two weekly indexes; the Purchase Application Index, and the Refi Index. Both are largely ignored by the bond market, the Refi is completely ignored.

There is an important speech tomorrow. Philadelphia Federal Reserve Bank President Charles Plosser to speak about housing prices and U.S. monetary policy, at the European Economics and Financial Centre seminar, in London. Audience, media Q&A expected. The speech will be given at 10:00cdt {16:00gmt}. The bond market will pay attention given today’s news on the home financing.

Federal Reserve Governor Kevin Warsh (FOMC voting member) and Treasury Under Secretary for Domestic Finance Robert Steel will testify at a House Financial Services Committee hearing on hedge funds and systemic risks, in Washington. This will also be at 10:00cdt. It will probably have no affect on rates, but there is no guarantee on that.

Jobless Claims and the Trade Budget are published at the market’s opening on Thursday. The T-Budget is out in Mid-day. The first two can influence rates frequently, the T-Budget can occasionally.

There are two FED speeches, but both are after the market closes and may affect rates on Friday, but there is important items out in the morning.

Friday opens with the Retail Sales Report, and Import Prices. About two hours into trading sees the Business Inventories report and the prelim-Michigan Consumer Sentiment Report. All of these items can move rates.

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