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The week that was:

Everything was ticking along fine in the bond and mortgage markets until Thursday afternoon when the 30 yr bond auction results saw much less demand than was expected. The first time in a few weeks the markets were slapped down on the belief there was no end in sight for demand of US treasuries. Mortgages however held their ground on Thursday but Friday the mortgage market was slammed hard, as always following the lead of the treasury markets; mortgage prices fell 29/32 by the end of the day Friday; the yield on mortgages spiked back over 5.00%.

Freddie Mac’s weekly Primary Mortgage Market Survey® reported 30-year fixed-rate mortgage (FRM) averaged 4.87 percent with an average 0.7 point for the week ending October 8, 2009, down from last week when it averaged 4.94 percent. Last year at this time, the 30-year FRM averaged 5.94 percent. The last time the 30-year FRM was lower was the week ending May 21, 2009, when it averaged 4.82 percent.

The five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.35 percent this week, with an average 0.5 point, down from last week when it averaged 4.42 percent. A year ago, the 5-year ARM averaged 5.90 percent. The 5-year ARM has not been lower since Freddie Mac started tracking it in 2005.

The week that will be:

After the big jump in interest rates last Thursday and Friday we expect to see increased market volatility in the bond and mortgage markets this week. The rate markets have likely seen their best levels when yields hit lows on Thursday morning (4.90% on 30 yr mtgs, 3.18% on the 10 yr note) but we do not believe interest rates will start a major run to higher rates. Likely markets will start to establish a new trading range, basis the 10 yr treasury, driver for mortgage rates, between 3.25% and 3.50%: mortgage rates 5.00% to 5.37% for 30 yr fixed rates. Last week not much data, this week a few key reports to consider. Sept retail sales, Sept consumer price index and the Philadelphia Fed business index are headliners. The bond and mortgage markets are closed Monday for Columbus Day but equity markets will be open.