Concord Condominiums

The yield curve on U.S. Treasury securities flattened on Wednesday, with the yield on the 10-year bond higher than that of the 2-year bond. This is the first time the yield curve has returned to 'normal' since January. An inverted yield curve -- when the yield on the 2-year is higher than that of the 10-year bond -- has signaled an economic slowdown in the past, as well as the last three recessions.

For the past few days bond traders have been gripped with fear that the global markets will be raising interest rates and the Fed will have to follow to remain competitive. Massive selling erupted and Wall Street also put together a string of losses reflecting its concern about the negative effect higher interest rates would have on corporate bottom lines. Mild selling today seemed to reassure equity traders, and Treasury yields, which move in the opposite direction of prices, remained close to those of yesterday. This allowed mortgage rates to edge just a shade higher than those of Tuesday.

Fed officials continued to stir a pot of concerns. Chicago Fed president Michael Moskow, in a speech Tuesday evening, said that further tightening could be expected if signs of inflation remain present. But St. Louis Fed president William Poole, who said Monday that the Fed is watching for signs of inflation in the nation's strong economic growth, calmed concerns about a housing bubble, saying that he expects housing to remain strong.

There were no economic reports on tap for today, but the Energy Information Administration reported that crude oil inventories in the U.S. were substantially higher than forecasts. This, paired with OPEC's pledge to continue delivering 28 million barrels of oil per day, sent oil prices plunging. OPEC said its decision was based on its determination to keep oil prices affordable for the consumer and fill supply gaps such as those created by recent problems in Nigeria. Oil prices dipped below $60, but recovered some of their earlier losses, closing down $1.56 to $60.02 a barrel.

In a separate report, the Mortgage Bankers Association said that mortgage application volume held steady for the week ended March 3. Purchase applications eased 0.4 percent, while applications to refinance rose 2.6 percent, accounting for 38.5 percent of all applications. Applications for adjustable-rate mortgages edged down to 27.9 percent.

Stocks improve outlook

Stocks took heart from the steadiness in Treasuries and rallied in the last hour of trading. Money, however, gravitated toward staples, which do well even in a down economy. Dow Jones industrials Procter & Gamble, Coca-Cola and Altria each gained more than 1 percent, as did IBM. The only component to lose more than 1 percent was Alcoa, which has been racked by interest rate worries.

Google and the New York Stock Exchange Group Inc. made news. Google fell 2.9 percent after it was learned that the search engine giant had erroneously posted slides of expected first-quarter revenue growth and profit margins on its investor relations Web site during its recent analysts' day meeting. Google executives said the slides were not representative of current expectations. On the other hand, shares of the NYSE soared 24.5 percent during its second day of trading. The Exchange went public Tuesday after acquiring Archipelago Holdings Inc.

The Nasdaq made a run toward positive territory, but closed with its fifth straight loss. Google held it back and put pressure on other Internet stocks. Sun Microsystems also lost 2.5 percent. JDS Uniphase bucked the trend with a 7.14 increase, and Qualcomm closed up 3.5 percent, but it wasn't quite enough.

As of 4 p.m., EST:

The Dow Jones industrial index closed up 25.05 points (+0.23 percent) to 11,005.74; the Nasdaq composite lost 0.13 points (-0.01 percent) to 2,268.25, and the Standard & Poor's 500 index gained 2.73 points (+0.21 percent) to 1,278.61.

The 30-year Treasury bond closed down 6/32 in price with the yield rising to 4.72 percent, from 4.71 percent on Tuesday.

The 10-year Treasury note closed down 2/32 in price with the yield rising to 4.74 percent, from 4.73 percent on Tuesday.

The five-year Treasury note closed even in price with the yield holding at 4.74 percent.

The two-year Treasury note closed up 1/32 in price with the yield falling to 4.72 percent, from 4.75 percent on Tuesday.

At 4 p.m. EST, average mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year conventional fixed-rate mortgage at 6.122 percent, up from 6.11 percent on Tuesday.

The 15-year conventional fixed-rate mortgage at 5.747 percent, up from 5.718 percent on Tuesday.

Coming up:

Weekly first-time unemployment claims for the week ended March 4 are due on Thursday, along with the U.S. trade deficit for January. Analysts are expecting claims to fall by 6,000 to 288,000, which would make it the eighth straight week below 300,000. The deficit, on the other hand, is forecast to come in at $66.8 billion, which would be a slight increase from the December reading of $65.7 billion. The trade gap generally has more impact on the currency market than on stocks and bonds.

The Bank of Japan will meet tomorrow (actually, overnight due to the time difference) to discuss its own interest-rate situation. Bearish news from that meeting would certainly spark selling in Treasuries when the U.S. markets open tomorrow.

Due to the relative stability of Treasury yields today, there is little reason to believe that mortgage rates will move far from present levels overnight and into Thursday morning.

Carolyn Siegel

Carolyn@interest.com

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