Tuesday, November 16, 2010

Market UpDate

Tuesday’s bond market has opened well in positive territory following the release of some quite favorable economic data. The stock markets have reacted as we would have expected, showing early losses. The Dow is currently down 130 points while the Nasdaq has fallen 24 points. The bond market is currently up 16/32, but unfortunately we will likely not see an improvement in this morning’s mortgage rates due to fairly significant weakness late yesterday. With yesterday’s late selling, I am expecting to see this morning’s mortgage rates to be approximately .375 of a discount point higher than yesterday’s morning rates.

Both of this morning’s economic releases gave us results that were extremely favorable to the bond market and mortgage rates. The first was October's Producer Price Index (PPI) that showed a 0.4% increase in the overall reading and a 0.6% DECLINE in the more important core reading. This was well below foreca sts for each, meaning that inflationary pressures were nowhere near as strong as many had thought, at least not at the producer level of the economy. This is extremely good news for the bond market and mortgage rates because inflation is the number one nemesis of the bond market. It erodes the value of a bond’s future fixed interest payments, making them much less attractive to investors. The end result is falling bond prices and higher mortgage rates.
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