The 10-year Treasury closed flat at 4.618% which was -.002% over yesterday’s close.  It was not always that way in today’s trading session.  At one point the rate on the 10-year Treasury reached the day’s high of 4.681%, +.061%. 

It was not the only economic item out there.  The Weekly Initial Jobless Claims was forecast lower than last week’s 322,000.  Estimates range from 315,000 to 320,000.  322,000 workers filed for first time unemployment insurance.  As an inverse indicator, a higher than expected number is actually bad for the economy, and good for rates.

In simple terms, investors renewed their appetite for risk after strong sessions in Asia trading.

Later in the day, the CEO of Countrywide Home Mortgage dropped the ‘r’ word.  Stocks lost steam after the chief executive of Countrywide Financial, Angelo Mozilo, told CNBC that the housing market will lead the U.S. economy into recession and that credit market woes were not over.  Money that left the stock market went to the bond market, buoying prices, and moving rates back to yesterday’s close. 

It is important to remember, that Countrywide is a company in trouble.  That most likely is clouding his vision.   

SHORT-TERM OUTLOOK [23 August 2007]

It looks as if a new trading range has emerged.  It appears the ceiling is around 4.900%, maybe a 5.000% flat.  The floor seems to be around 4.500%.  The new floor of 4.500% was first established on 17 August

MID-TERM OUTLOOK [23 August 2007]

There are some bright spots, and a couple dark spots for rates in the next few months.  First, the good news for rates:  But, remember, good news for rates often means bad news for the economy. 

A.)  Investor Sentiment seems to have turned.  During most of the 2^nd quarter investors seemed to grab onto any news that would increase rates.  At the same time, they ignored news that would have lead to lower rates. 

On 18 July, FED Chair Ben Bernanke stated he saw evidence that inflation would be lowering in the last ½ of 2007.  (He was optimistic for 2008.  See Long-term outlook.)

        Sentiment on the part of bond investors clearly changed as of 18 July 2007.  On that day the 10-year Treasury traded below the recent floor of 5.000%.  On the next day, and on 20 July, and Monday 23 July the 10-year Treasury closed below that 5.000%.  What is significant about those two days is the complete absence of significant data.

B.   Inflation has been encouraging.  CPI, PPI and PCE all have been at or bellow expectation.  Inflation is the greatest fear for bond investors.  Better than forecast inflation numbers have brought investors back in.

C.   Consumer Sales numbers have improved over the 2^nd quarter, but not in such a dramatic way to threaten inflation.

D.   The housing bubble has burst.  But, will housing continue to decline?  Is it flattening?  Or, is it on the verge of a rebound?  The data when compared to last year has been mostly negative, but there can always be evidence indicating other directions. 

The housing market problems have a way of creating a cycle.

Clearly, the sub-prime mortgage industry was lending money to buyers that could not repay.  That has resulted in very high default and foreclosure rates.  These problems in the subprime market cause investors to steer money away from the sub-prime lenders.  At the same time, there was a lot of housing activity in the years ending in 2004.  Eventually this high amount of activity came to an end.  All economic events are cyclical and they usually work out this way.  But, when the boom ends prices and activity tend to fall off.  That is the condition we are in the middle of 2007. 

Now, we have the perfect storm.  While not the majority, many of the home buyers were those that qualified for the sub-prime mortgages.  Now with fewer buyers, the housing market is hurting more.  That is causing prices to go lower.   That means more foreclosures when problems occur.  That means more skitterish nervousness from investors in mortgage instruments.  And thus, the cycle continues.

There are also a few concerns for rates in the mid-term and long term:

1.)  The US and the global economy are in a recovery.  No it is not as booming as it was during Reagan.  And it is not as strong as it was after the GOP took over congress in 1994.  But the 2.2% Main Stream Media will not report this. 

Eventually, it becomes obvious to even the most casual investor and observer.  That will move rates higher.

2.)  In February this blog commented on one inflation concern: corn prices.  The fears were not unfounded, and are still a concern.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com