Two-month bond rally hits bottom

Mortgage market commentary

The two-month-long bond rally has hit bottom. It's been fun: From a peak at 5.24 percent, the 10-year T-note made it to 4.73 percent yesterday, which has taken mortgages from just below 7 percent to just below 6.5 percent.

This morning's news that August payrolls had grown by 128,000 jobs was the rally killer -- the economy is slowing, not crashing. Bonds are way ahead of a chance for Fed easing; in the presence of current inflation numbers it cannot ease unless it sees a real threat to economic growth.

We might get some inflation relief from a decline in oil prices. One hint: on Tuesday morning, when Ernesto's forecast changed from Gulf to Atlantic impact, oil prices fell below $70 as soon as markets opened. To have so much money deployed in a weather wager is a reminder that as a betting parlor, the financial markets make Las Vegas look like a Christmas Club. There is an ocean of oil in storage, and the speculative owners may tire of hoarding.

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