Here’s why. It has to do with something called the velocity of money. Even though the government keeps pumping money into the system, nothing happens until that money is spent or lent – and passes from one hand to another or one business to another. The speed at which this money passes between parties is called the velocity of money.

With the job market still very sluggish, consumers aren’t spending much money these days, and businesses are still reluctant to spend money to make investments in their business. With the present velocity at low levels, inflation remains subdued and that’s good for home loan rates. That’s because rates are tied to Mortgage Bonds and inflation is the archenemy of Bonds, so low inflation is good for Bonds and rates. However, once velocity increases, the excess money in the system will cause inflation – which is bad for rates, since even the slightest scent of inflation can cause home loan rates to worsen.

While we certainly want to see better economic recovery news in the near future, we have to remember that there’s an inverse relationship between good economic news and Bonds and home loan rates. Weak economic news normally causes money to flow out of Stocks and into Bonds, which helps Bonds and home loan rates improve. Strong economic news, on the other hand, normally has the opposite result.

Currently, home loan rates are at a historically low level, but that situation won’t last forever. That means now is an ideal time to purchase a home or refinance before the velocity of money – and rates – change. If you or anyone you know would like to learn more about the current economic situation and how to take advantage of historically low home loan rates, then please contact me.

The Institute for Supply Management (ISM) said late this morning that their manufacturing index rose last month to a reading of 59.7. This was slightly higher than revised forecasts, meaning manufacturer sentiment was a little stronger than thought. That is negative news for bonds, but it was not enough of a variance to heavily influence trading or mortgage rates this morning.

There is no relevant data scheduled for release tomorrow, so look for the stock markets to help drive bond trading and mortgage rates. I f the major stock indexes remain calm, mortgage rates should follow suit.

Overall, will likely to be the most important day of the week for mortgage rates with May’s Employment report being posted. The rest of the week’s data could also lead to noticeable changes in mortgage rates and we also need to watch for stock market volatility. I suspect this will be a fairly active week for rates, but most of the changes will probably come the latter part of the week.

The weekly average for the benchmark 30-year Conforming mortgage landed at 4.93%, low enough to entice many homeowners to again consider refinancing. I locked a client in on a 3.125% 5/1 ARM this week, which hasn’t been available for over nine months.

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As we’ve noted in recent weeks, slow growth coupled with little inflation and a global flight-to-safety all accrue benefit to American mortgage seekers. As such, those contemplating refinances should take advantage. It is somewhat of a shame that the dip in rates didn’t actually occur during the last weeks of the homebuyer tax credits, since it might have goosed activity even further.

At 9:00 this morning the DJIA futures was trading -158, the 10 yr note +29/32 at 3.27% -10 BP and mortgage prices were +8/32 (.25 bp). At 9:30 the DJIA opened -170, the 10 yr +30/32 at 3.26% -10 bp and mortgage prices +10/32 (.31 bp).

The debt problems in Europe are not improving; the perception now is that there is no consensus in Europe on what to do next. The various sovereign countries appear to be divided about how to proceed and markets are increasingly more concerned that debt failures and possibly restructuring of the EU may drag that regions economies down. Europe is the weakest region in the larger global picture as other regions have managed better recoveries, now with the uncertainty increasing global and US economic futures are in play. Europe has had a month now to work out a solution but other than the $960B bank bailout there has been no progress—-at least that is how markets are seeing it now. Concerns are flaring that Greece’s deficit will spark a credit contagion and slow the global economy.

More data at 10:00; April leading economic indicators were expected to have increased 0.2%, fell 0.1% implying the economic outlook has cooled in the last month; LEI in March was up 1.4%.

At 10:00 the May Philadelphia Fed business index was expected at 21.3 it was 21.4 frm 20.2 in April; the sub components were soft however. The employment component declined to 3.2 frm 7.3, new orders declined to 6.1 frm 13.9 ion April and the price component fell to 35.5 frm 42.7 on lower energy costs. Not a good report and in line with current negative outlook for the economy; no initial reaction to the report (any index over zero is considered expansion, minus reads are contractionary.

April producer price index and consumer price index both declined for the first time in over a year leading investors to find value in longer dated maturities. With no concern of any inflationary increases now or on the longer term horizon, the economic outlook being scaled back, and the Fed likely to keep interest rates low for longer than was generally expected a month ago; investors are eyeing 10 yr and 30 yr notes and bonds and also high grade corporates. Mortgage rates are now the lowest since last August.

Very low mortgage rates have so far not generated the response we want to see; once the tax credit ended new applications for purchase fell 27% in one week. Re-financing is where the action is; with unemployment high and not likely to improve much through the rest of the year consumers are reluctant to step up to the best housing market in years for purchases.

US stock and bond markets are trading solely on the European debt problems; the perception being that Europe’s problems will slow US growth forecasts that had in many ways out run the likely realty. Europe brought investors around to looking for less growth than had been built into markets over the last few months. Both US bond market and US stock markets are at extremes on overbought (bonds and mortgages) and oversold (stock market), however with the sentiment now so locked in that equity markets remain over-priced and with the prospect of inflation completely off the table these technically over-extended markets can keep on going.

After the aid package over the weekend for Greece yesterday was a relief rally in US equities and some covering of safe haven trades in treasuries. This morning after a day of pondering markets are still unconvinced that Spain and Portugal won’t default. Markets are looking at the potential of the contagion spreading to those countries and possibly Ireland. The consensus for the moment is that there will be debt defaults in Europe that may spread into other mid-major economies.

Another rally point today; China’s manufacturing sector is slowing rapidly. Chinese officials have been moving to slow down the growth that would lead to inflation. Their equivalent to the US ISM manufacturing report released yesterday showing the best growth since 2004; in China today their index fell to 55.4 from 57 in March, signaling government attempts to cool the world’s fastest-growing economy are working.

At 9:00 this morning the DJIA is falling fast, down 87 points; the 10 yr adds to its improvement as the stock indexes fall. At 9:00 the 10 yr +16/32 to 3.63% -6 bp and mortgages +10/32 (.31 bp). At 9:30 the DJIA opened -150, the 10 yr +19/32 3.61% -8 bp and mortgage prices +10/32 (.31 bp).

At 10:00 this morning two data releases; Mar factory orders were expected to have declined 0.2%, orders increased 1.3% and Feb was revised from +0.6% to +1.3% Ex transportation orders, orders were up 3.1%. Manufacturing is gaining momentum. The second and final data today; March pending home sales were expected up 5.0%, as reported up 5.3% and up 21.1% from March 2009. Both releases were better than expected but no improvement in the stock indexes or softening in treasuries—-but mortgage prices have drifted off their best levels at 9:30.

Market volatility remains high and will likely continue to be that way with the debt default concerns and still thoughts that the stock market is still overbought and due for a correction which so far has not occurred. The DJIA and other key indexes are being ripped hard right on the open this morning, fueling safety moves to treasuries and in turn firming mortgage prices. Mortgages will lag treasuries however, but will move better as treasuries work higher in price.

The DJIA opened +40 this morning, at 9:30 the 10 yr note -11/32 at 3.72% +4 BP and mortgage prices -5/32 (.15 bp) frm yesterday’s close. Prior to 9:30 mortgage prices were off 8/32 (.25 bp) so morning pricing may be worse than where markets are trading at 10:00.

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