YOUR Mortgage Minute -- The Week That Was 12/21-12/24, 2009

Good Afternoon,

I hope you had a terrific Christmas and are enjoying all the festivities that this time of year brings. Here's a look back at what happened in the markets.

It felt more like Groundhog Day than Christmas last week. Continued selling in Treasuries pushed the yield on the benchmark 10-year note to yet another four-month high. It closed at 3.80% on Thursday. This has everyone talking about the yield curve (the difference between the yield on the 2-year and 10-year notes). On Tuesday it hit a record high, indicating to many that economic recovery is on the way. Investors are deserting the safety of government debt and heading for riskier Wall Street investments.

Treasuries are headed for their worst monthly performance since January, and could be hit by further losses next week. Traders and analysts are already fretting over a $118 billion in notes going on the auction block at a time when extremely light trading could kill demand for government debt. Treasuries got pounded last week, in spite of a mixed bag of economic reports that began with a big increase in existing home sales for November. Sales rose 7.4% to an annual rate of 6.54 million units. Analysts, however, attributed some of the increase to first-time buyers who wanted to cash in on the tax credit, thinking it would expire at the end of the month.
The final revision of 3rd quarter GDP was more bond-friendly. Economic growth was revised downward to 2.2% from 2.8%. The initial report showed growth of 3.5%. Less spending on business investments and consumer services like health care dragged the GDP down.

A couple of weak reports on Wednesday gave bonds their only plus day of the week -- and the gain was small. New home sales in November plunged 11.3% to an annual rate of 355,000 units, the lowest since April and far below a prediction of 421,000 units. But inventory dropped to 7.9 months.

The University of Michigan's final consumer sentiment survey for December also came in below expectations. It fell to 72.5 from 73.8 two weeks previous, but it rose during the month from the November end index of 67.4.

Personal income in November rose 0.4% -- the best since April -- thanks to an increase in worker compensation. Spending rose 0.2% -- less than the 0.4% October increase. The core PCE, a key inflation gauge, came in at 0%, falling from 0.2% in October. This provided some good news for bond traders that fear inflation will rob fixed rate assets of value over time.
The final reports for the week didn't support Treasuries. First-time unemployment claims fell by 28,000 to 452,000 for the week ended Dec. 19. The four-week moving average also fell to 465,250. And continuing claims -- those collecting benefits for more than one week -- dropped to 5.076 million.

Orders for durable goods, big ticket items meant to last for more than three years, rose 0.2%. Excluding autos, orders were up 2.0% -- both beating October totals but falling short of analysts' expectations. During the week ended Dec. 18 it appears that more people were shopping for gifts than for mortgages. In spite of attractive rates, the Mortgage Bankers Association reported that purchase applications fell 11.6% and refinances were down 10.1%.

This last week of the year will feature light trading and few economic indicators, although there are a couple that could influence the markets. Probably the most influential of the reports is Tuesday's consumer confidence index for December, as reported by the Conference Board. Economists predict it will rise to 53.7 from 49.5 in November. This would put pressure on Treasuries, as spending consumers would likely push the economy forward.

The Case/Shiller report on housing prices in the nation's 20 largest cities generally has little impact on Treasuries, although Wall Street often reacts. It's expected to show October prices down 7.45% -- better than the 9.36% decline in September. Wednesday brings the Chicago Purchasing Managers Institute (PMI) index of December manufacturing conditions in the area. While it's expected to edge down to 55.6 from 56.1, any number above 50 indicates expansion in the sector. The year wraps up with first-time unemployment claims for the week ended Dec. 26. Analysts expect the number to edge down to 450,000 from 452,000, which would not have much impact on the markets.

I hope that you have a terrific week. Enjoy the last days of 2009! If there is ever anything that I can do for you, please let me know.