Friday’s bond market has opened in positive territory despite clearly unfavorable inflation news. Stocks are likely contributing to this morning’s bond gains by posting sizable losses of 704 points in the Dow and 198 points in the Nasdaq. The bond market is currently down 7/32 (3.97%), which should improve this morning’s mortgage rates by approximately .125 of a discount point.

Yesterday’s 7-year Treasury Note auction went a bit better than Wednesday’s 5-year Note sale. The benchmarks we use to gauge investor demand for the securities showed yesterday’s sale drew a little stronger investor participation than Wednesday’s auction. We did see a modest reaction in the broader bond market after results were announced at 1:00 PM ET, but it wasn’t enough to cause an intraday improvement in rates yesterday afternoon.

This morning’s release of January’s Producer Price Index (PPI) revealed wholesale inflation was much stronger than expected last month. The overall PPI rose 0.5% for the month while the more important core data that excludes more volatile food and energy costs spiked 0.8%. These readings greatly exceeded predictions of 0.3% for both and follow increases of 0.4% and 0.6% respectively in December.

The year-over-year numbers weren’t much better with the overall reading at a 2.9% annual rate. This was slightly softer than December’s 3.0%, but stronger than the 2.6% that was expected. Worse yet, the core reading that is more closely watched rose from December’s 3.3% to 3.6% last month when analysts were expecting to see it have slowed to 3.0%.

We are hard pressed to find anything in the data that is good news for bonds or mortgage rates. Rising inflation makes long-term securities less appealing to investors because their future fixed interest payments are less valuable to investors. It also not only makes another Fed rate cut in the near future much less likely, but increases the possibility of them moving key rates higher to prevent inflation from rising further. Yes, these type of inflation numbers make a rate hike more likely the Fed’s next move than a rate cut.

Today’s move in bonds has the benchmark 10-year Treasury Note yield below 4.00% for the first time since November. This is very good news for mortgage rates, assuming it can hold below that level. The fact we saw improvement in bonds and a break below what is considered to be an important threshold of 4.0% in the 10-year Note is quite surprising on a day that data shows inflation is moving away from the Fed’s 2.0% goal instead of towards it. We may be seeing stock funds being shifted into bonds as a safe haven from the selling in stocks. The key question is whether or not this pattern will continue or reverse course next week. When it fell below 4.00% in November, preceded by multiple times in October, each move was short-lived. They were all followed by a change in direction that brought it back above that level almost immediately. Staying below would be good news for mortgage shoppers because mortgage rates tend to track bond yields.

Next week has several major economic reports scheduled for release, starting with February’s ISM manufacturing index late Monday morning and ending with February’s Employment and January’s Retail Sales reports early Friday morning. There are also a few moderately important reports that will be posted in between. Look for details on all of next week’s activities in Sunday evening’s weekly preview.

If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.