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Investing Specialists

Economy Should Bottom this Quarter, but Headwinds Stir

Our take on this week's economic indicators.

The Rate Debate
This week's trading activity was not driven so much by economic indicators but another run-up and run-down in 10-year Treasury rates and increases in commodity prices.

The economic community is torn as to the interpretation. Some economists believe that the higher rates are just a return to normalcy. These observers argue that panicked investors, who were buying Treasuries at any price, are now deploying their capital in a more normal pattern. This has increased the demand and reduced the yields for corporate bonds and decreased the demand and increased the yields on Treasuries. Some economists in this camp would go so far as to say that this increase is a good thing, as it demonstrates strong investor confidence in the future. Others believe that the stimulus and fears about government spending are driving rates higher. Smart people could argue this all day, but the fact that corporate rates have not gone up nearly as fast as Treasury rates lends more credence to the return to normalcy argument.

Nevertheless, the higher rates on the 10-year Treasuries (up from about 2% to a spike of about 4% recently) have driven up mortgage rates from the mid-4's to the mid-5's in short order. The effect of higher rates has shown up immediately in new mortgage applications, which have been down several weeks in a row. The impact has been much greater on the refinance market than the new purchase market. Even with higher rates, housing affordability (which factors in both prices and interest rates) remains near record levels. Perversely, a move to a higher rate as well as the potential expiration of some housing tax credits may finally push some on-the-fence buyers back into the market.