April 22nd, 2010 10:13 AM

Bond markets improved yesterday on a flight to safety trade related to continued fears about Greece defaulting on their debt.  Bonds are flat this morning, while stocks are down slightly.  Economic news and corporate earnings continues to be either near expected or slightly better than expected.  As such, it is not clear whether a sell-off in stocks will really occur.  Technical analysts have been raising red flags about the current level of equities but stocks have so far been very resilient.  One of the reasons 30 year rates have not jumped up to the mid 5's level as had been anticipated after the Fed stopped purchasing mortgages has been that fear of a stock market selloff has kept money invested in bonds.  Should a stock sell-off not materialize, it is likely that pressure on rates will increase as money flows from the perceived safety of bonds and agency (Fannie Mae and Freddie Mac) mortgage-backed securities (MBS) into equities.  On the flip side, should a stock market sell-off materialize, it is expected to be supportive of current mortgage rate levels.

In regards to the Greek crisis, new data out puts Greece's budget deficit at 13.6% of GDP and higher than what was thought, making a bailout more of a problem. Greece’s benchmark 10-year bond yield rose to 8.49%, the highest since 1998 and more than twice the comparable German rate. The cost of insuring government debt against default climbed to a record today. Greece’s widening deficit and questions about the accuracy of its economic data have undermined the credibility and enforcement of the EU’s budget rules. Greece’s shortfall last year was more than four times the EU limit, though it wasn’t the region’s biggest. Ireland’s budget gap was revised up to 14.3%, the largest for any country since the start of the euro in 1999.

In economic news, Initial Jobless Claims for week ended 4/17/10 were down 24,000 vs expectations of a decline of 29,000.  Continuing Jobless Claims for the week ended 4/10/10 were down by 40,000 vs expectations of an 86,000 decrease.  The March Producer Price Index (PPI) was up .7% vs expectations of a .5% increase.  The Core PPI (excluding food and energy) was up .1% which exactly matched expectations.  March Existing Home Sales were up to a 5.35 million annualized pace which was slightly better than expectations of a 5.3 million pace. Single family sales were up 7.3% with 44% of the sales to first time home buyers. The inventory of homes on the market increased 1.5% to an 8 month supply due to the level of foreclosed properties hitting the markets.  It is important to note that a 1.5% increase in inventory is not nearly as monumental as one would expect given some of the dire forecasts regarding "shadow" inventory.

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