YOUR Mortgage Minute -- The Week That Was 12.27.2009-12.31.2009

Treasury securities were hit hard again this week due to positive economic reports and so-so demand for government debt at the three auctions that were held last week.

The yield on the benchmark 10-year note, which moves inversely to price, hit 3.87% on Thursday before closing at 3.83% -- the final day of trading for 2009. This is its highest level since June. One year ago it was at 2.09%.

Because of upcoming auctions, on Monday traders sold, pushing prices down and yields up. Signs of an upturn in retail sales also sent money to Wall Street. However, the auction drew strong demand, making it the most successful of the week.

On Tuesday the first of the scant economic indicators showed consumer confidence rising to 52.9 in December from 50.7. Even though it was a notch below expectations, the increase put pressure on Treasuries. In the bigger picture, however, it still has a long way to go before a level of economic stability (90) is reached. A reading of 100+ indicates economic growth.

The Case/Shiller report on home prices in the 20 largest cities in the U.S. came in flat in October after four months of increases, which would have allowed bonds to hold near current levels. But the rise in the dollar, a sign of economic improvement, sent yields up.

The Chicago PMI index of manufacturing conditions in December rose to 60 from 56.1. Also weighing on bonds was Wednesday's auction of 7-year notes, which was fairly well received but lacked support from foreign buyers and institutional investors.

The final dagger came on Thursday, when first-time unemployment claims fell by 22,000 to 432,000 during the week ended Dec. 26 -- the lowest since July 2008. Analysts had expected claims to rise to 460,000. This decline points to a strengthening economy, which lessens the need for investors to put their money in safe investments.

Although we have a way to go, when claims hit the 350,000 mark, it would indicate positive job growth. And we're inching closer to that number just about every week. Job growth also hints of future inflation -- the sworn enemy of bonds -- as it devalues their worth over time.

The Mortgage Bankers Association was closed last week, so numbers for applications for the weeks ended Dec. 24 and Dec. 31 will be out next week.

This is a normal week for economic releases, but Friday could be a tough one if analysts are correct about jobs losses in December. Some believe the unemployment report will show that no jobs were lost last month, which would likely ignite selling in Treasuries. Although the data could be skewed due to the holidays, it would likely have a detrimental short-term effect on Treasury yields. However, the same folks predicting zero job losses see the unemployment rate holding at 10%.

The rest of the week's reports are more acceptable from a bond trader's point of view. On Monday construction spending for November should show a 0.5% decline, versus a flat reading in October. Separately, the ISM index on nationwide manufacturing conditions is expected to edge up to 54.0 from 53.6, which would probably not be a big enough gain to have much of an effect on traders.

Factory orders for November come out on Tuesday, and they're expected to rise 0.5%, which is slightly less than October's 0.6% increase. The other indicator, the ISM index on the service sector, could have more impact. It is expected to rise to 50.5 from 48.7. Although it is less than a two-point increase, it would top the 50 mark, indicating sector expansion.

The only report due Thursday is weekly unemployment claims for the week ended January 2. If they drop again, this will put pressure on Treasuries, but some traders might be willing to wait until Friday's full report to make any moves.

Also due on Friday is the report on wholesale inventories for November. Because it (almost) always follows the monthly unemployment report, it usually gets kicked to the curb. In November inventories are expected to fall 0.1%, versus a 0.3% increase in October. Falling inventories will eventually ramp up the need for manufacturers to rebuild inventories, which could boost employment.