FOCUS ISSUE FOR THE WEEK: There was a lot of volatility in the 10 year bond these past two weeks. The yield soared from 3.69% to 4.0% and then came back down to 3.88%. What was that all about? We think investors thought the economy was recovering quickly given the strong employment report last week. As more information came in, it was clear the economy wasn’t as strong as it first seemed. Initial claims for unemployment rose this week. Consumer debt fell in February. Long term unemployment comprised 44% of the number of unemployed. Also, the Greek economy wasn’t recovering so the euro and European debt were still in trouble making the U.S. debt relatively safer. A closer view of the chart showed there was only a two day anomaly on April 5 and 6 when the rate hit around 4% and then retreated back to a more normal range in the mid-3.8%. We had bigger jumps in the rate several months ago. Back in December 2009 the rate rose from 3.2% to 3.8%. Last April and May the rate rose from 2.8% to 3.9%. Over the past year the moving average has been 3.4% to 3.6%. Absorbing the huge federal deficits will cause rates to rise. Over the past decade the moving average was mostly 4.0% to 4.5%. It seems very likely we are heading back to the longer term average. That means a 30 YFR mortgage of 5.4% to 6.0% at year-end. We are at 5.21% this week, the highest in eight months.

WORLD TRENDS: The premium on Greek 10 year debt over Germany debt reached a new high of 442 bp and then retreated. The Euro fell to $1.33 from $1.349 and then came back to $1.347. At first, the market doubted the commitment to rescue the Greek currency. Fitch downgraded Greek debt by two notches. On April 9 there was a rally in Greek bonds and the euro as speculation grew of an imminent bailout. There was no growth in the 16-nation Euro region in 4Q09 and a very slight recovery in 1Q10. The U.S. dollar’s share of global currency reserves rose to 62.1 percent in the fourth quarter of 2009 while the euro’s share dropped to 27.4 percent, the International Monetary Fund said. Hank Paulson, former Treasury Secretary, said that despite the huge debt crisis in the U.S., our competitors worldwide are even worse off. China is on the brink of a bubble popping in their housing market as early as next year said Chanos, who runs a hedge fund.

The DJIA rose 0.6% from 10,927 to 10,997. For the week there were 7 positive trends offset by 9 negative trends.

Positive Trends

• Pending home sales rose 8.2% in February after declining 7.8% in January reported the National Association of Realtors. This was more than expected by economists who follow the series. It implies housing is having a recovery.

• The ISM services index rose to 55.4% in March, up from 53.0% in February. This was also a bit stronger than expected. It is another indication of growing strength in the services sector of the economy which is much larger than the manufacturing sector and has been growing for some time.

• Apartment rents rose 0.3% during the first quarter from fourth quarter 2009, ending five straight quarters of declines. According to Reis Inc. apartment vacancy rate stayed flat at 8% in 1Q10. They track vacancies and rents in the top 79 U.S. markets. Rents rose in 60 of them. This signals that the worst is over for this sector.

• A survey of 105 top U.S. executives, the Business Roundtable, reported their optimism of the future is up. Their index number rose to 88.9 in 1Q10 from 71.5 in 4Q09. Any number over 50 represents growth. In the next six months, 73% expect sales increases, up from 68% in last quarter’s report. Only 29% expect to increase payrolls, up from 19% last quarter. They expect GDP this year to grow 2.3%.

• Target Corp. and Gap Inc. climbed more than 2 percent to lead chain stores higher after research firm Retail Metrics Inc. said March same-store sales climbed more than forecast.

• The spread between the 10-year and 2-year Treasury widened to 282 bp, a new record. This means investors expect a strong economy, high inflation, or doubt the ability of the government to control its finances.

• Two senior officials at the Fed hinted that the Fed will keep short-term interest rates low well into the year.

Negative Trends

• The 10 year Treasury rose to 4.00% on April 5 from 3.94% on April 2 and 3.68% on March 19. This is higher than the 3.7% forecast by MBA for March 31 and suggests their origination forecast is too optimistic. Bond dealers forecast the yield on the 10-year note will climb to 4.2 percent at the end of this year, according to the median estimate in a survey by Bloomberg News. That’s still lower than the 5.46 percent average over the last 20 years. If the 10 year Treasury reaches 4.2% at year-end that implies the 30 YFR mortgage will hit 5.5%. As of April 9, the 10-year has retreated back to 3.88%.

• The price of crude oil on NYMEX rose to $86.50/barrel in mid-week, up 35% from a year ago and up 7% from a week ago. On April 9, it was back down to $84.94.

• The civilian noninstitutional population rose at an average amount of 173,000/month from March 2009 to March 2010 reaching 237 million. This is the number of adults in our population who might possibly want to work. Obviously, most senior citizens don’t want to work or can’t work. So we use the concept of the civilian labor force which includes only adults who want to work. The civilian labor force rose by an average of 370,000 over the past two months reaching 154 million. In March 2010 the civilian labor force was actually a bit below where it was a year ago because many people had dropped out of the labor force. Many of those dropouts are now returning. This suggests that just to keep the rate of unemployment constant we will need nearly 200,000 net new jobs each month over the next year. The payroll report for March showed 162,000 net new jobs of which 48,000 were part time positions (for three months) at the Census and another half of the remaining jobs were replacing weather related shutdowns in February. We will require a higher rate of new jobs than we had in March to bring down the rate of unemployment this year. Even the Obama administration is not seeing the unemployment rate declining much over the next two years.

• The Labor Department reported that in February there were 2.72 million job openings nationwide. There was one job for every 5.5 unemployed persons seeking a position. Three years ago there was one job opening for every 1.5 job seeker. This means there will be minimal wage increases.

• Initial claims for unemployment unexpectedly rose to 460,000 for the week ending April 2, up from 442,000 the prior week. The 4-week moving average rose by 2,250 workers. However, continuing claims fell to 4,550,000 from 4,681,000.

• Consumer borrowing declined at a 5.6% annual rate in February to $2.45 trillion, reported the Federal Reserve. There had been a 2.1% increase in January. Part of the February decline was due to winter storms that kept consumers at home.

• Fed Chairman Bernanke said the budget deficit is now in excess of $1.3 trillion and is therefore more than 10% of GDP. Even after we are in recovery the deficit will be between 4% and 7% of GDP which is too high. Something should be done to reduce that deficit. That sounds like raising taxes. Ex Fed Chairman Volcker said we should have a value added tax (VAT) as is the general practice in Europe. It runs as high as 20% in some countries.

• The U.S. unemployment rate for workers under 25 years old is about 20%. Long term joblessness (over 6 months) was about 44% of the total unemployment in February. Our country is beginning to look like Europe.

• The average rate on the 30 YFR mortgage rose to 5.21% on April 8, up from 5.08% the prior week according to Freddie Mac.

Future meetings run by Access Mortgage Research:
17th Benchmark Study Meeting for the Wholesale Channel – in Washington, DC, April 12-13, 2010.
17th Benchmark Study Meeting for the Retail and Consumer Direct Channel – May 18-20, 2010 in Milwaukee.
Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. We do customized reports from databases of mortgage lenders. For more details see www.accessmrc.com or phone 410-772-1161.