The bond market was in its third week of terminal ennui, traders fidgeting, antsy, without volume, hence also without commissions, and complaining bitterly about the wait for the Fed (“I don’t care what they do…just do [deleted] something…get [deleted] on with this, already.”)

Then, yesterday, a surprise: new orders for durable goods tanked 1.6 percent in May despite expectations for a strong rebound from the 2.6 percent dump in April. A one-month decline doesn’t mean a thing…two in a row is a reminder that a strong economy is not guaranteed by contract. In another surprise, new claims for unemployment insurance ticked up to the 350,000 range, and long-term claims rose a ton; however, the claims series requires several weeks to confirm a trend.

Home sales roared ahead, but some of the May spike may have been caused by buyers’ efforts to get in the game ahead of a rapid rate rise. In every rate up-cycle, many economists insist that strong home sales have been caused by the buyers-in-a-hurry phenomenon. Most of the time, I think this theory is mistaken: an overheating economy has momentum, causing a home-sale surge simultaneous with Fed tightening efforts to slow the overheating. This time is different: in 30 years in these rackets, I have never had so many clients say out loud that they are trying to beat the Fed to the punch.

Mortgage rates improved only a little this week, crawling to the low-cost side of 6.25 percent; but the 10-year T-note made it out of the 4.8 percent range all the way down to 4.65 percent. For the moment, the up-side panic has abated.

Black-hearted traders (redundant) have forever described intervals like this as “deathwatch,” paying their respects in advance to colleagues who have placed the wrong bets for the aftermath of the Fed’s action next week. Until the fact, there is no way to know who is wrong, just the sure knowledge that there will be casualties.

Fed governor Bies added clenching and grinding to the scene by observing, “Sooner or later, our rate must rise above the rate of inflation.” It’s a true statement, but which rate of inflation? One of the GDP deflators, presently 1.7 percent? Perhaps core CPI, somewhere around 2.5 percent, but understating the true rate of inflation, as certified by one army of analysts, or overstating, as guaranteed by another army?

How far above inflation? Old Taylor Rule two-something percent above? Or is that rule obsolete, now that we are trying to preserve inflation at a low level, and no longer trying to squeeze it down?

How fast will we get to wherever we are going? The only thing about the Fed’s post-meeting statement that is unresolved is what it will say about its pace: still “measured?” How about “gradual” as well?

I don’t think anybody knows the answer to any of the which-how-far-how-fast questions, not even Alan Greenspan. However, I do know what to watch: the yield curve. “The Curve,” the ever-changing holy writ of the bond market, is the graphic representation of spreads between short-term rates and long-term ones. It is the minute-by-minute cumulative tally of votes cast by tens of trillions of dollars of capital, and a powerful predictive tool.

After the Fed hikes .25 percent next Wednesday, if bond yields ratchet up by the same amount, then we are in trouble, according to The Curve, and a long, straight-line tightening campaign is in prospect. If, however, the Fed pops its quarter, and bond yields increase half that much, or less (“flattening” The Curve), then the long end is saying that the tightening will be to a lower ceiling, or on a shallow, long, and perhaps intermittent slope. My hunch is the latter: flatter.

Bonds and mortgages may not move at all after the Fed does, and the real show next week will be the jobs data on the Friday following.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at


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