The Recession this far...

Last week brought some market action when Fed Chairman Ben Bernanke discussed the recession, commenting that our economic recovery still faces "formidable headwinds." As you can see in the chart below, the current recession we have been in has been the longest in nearly half a century.



Because negative economic comments or news causes money to flow out of Stocks and into Bonds, Bernanke's words helped Bonds and home loan rates to improve early last week...but these improvements were short lived.

Bond prices and home loan rates responded poorly to the Treasury auctions of last week, as the Treasury instruments being auctioned off are in direct competition with Mortgage Backed Securities...and the continual record amounts of supply hitting the market requires record amounts of buying to take place as well. And remember - the Federal Reserve is winding down their Mortgage Backed Security purchasing program, so as they stretch out and ration their remaining purchases through the first quarter of next year, the reduced amount of their buying just adds to the problem.

And as with any item, when there is lots of supply and diminishing demand - Economics 101 tells us that the price of that item will subsequently go down. So as Bond prices go down, home loan rates go up - and last week saw home loan rates increase by at least .125% across the board.
Also adding to selling pressure on Bonds in the latter part of last week were several bits of good economic news. First, the Retail Sales Report for November was better than expected, marking the third monthly increase over the past four months. It appears that lower prices and good deals are helping to spur some buying activity, though it remains to be seen how this will impact retailers' bottom lines. Consumer Sentiment was also reported quite a bit better than expected.

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Coming this week... Wednesday will also bring a read on the housing market with the Housing Starts and Building Permits Report, as well as the Interest Rate Decision and Policy Statement from the Fed, following the end of their regularly scheduled Federal Open Market Committee meeting. A change in rates isn't expected - but any comments about inflation in the Policy Statement could rattle Bonds and home loan rates.

Fingers crossed.

Keith L.