Market Comment
Mortgage bond prices had another terrible week pushing mortgage interest rates considerably higher. Personal income, outlays, construction spending, ISM Index, and payrolls data came in stronger than expected. This did little to help the already shattered bond market. Oil prices continued to escalate hitting over $70/barrel. The Fed’s attempts to keep rates in check were not effective as selling pressure continued. Bernanke tried to calm the markets by reiterating forecasts of tame inflation, but his words fell on deaf ears among bond traders.

For the week, interest rates rose by about 1 and 1/2 of a discount point.

Payrolls
Last week was a prime example of the divergence between the unemployment rate and payrolls figure along with the risk of floating into important data. Unemployment came in at 9.4%, higher than the expected 9.2%, while non-farm payrolls fell 345,000, not as much as the expected 520,000 decline. Mortgage bond prices fell and rates spiked higher. Bond traders hoped the report would provide a solid indication that the labor market remained weak. Unfortunately it left more uncertainty. The unemployment figure is derived from a household survey while the payrolls number comes from an employer report.

Energy prices rose considerably, stoking inflation fears amid record debt levels. As a result, the record-low mortgage interest rates that everyone assumed would hold steady, have gone away. The Fed continues to purchase mortgage bonds in an effort to keep mortgage interest rates low but faces a daunting task as the selling pressure continues. The Fed still has over $700b marked for purchasing additional mortgage bonds. The question remains whether that will be enough to help rates turn lower. So far, it appears that additional measures are needed.

Related Articles: Fed, Rates, Unemployment