Two weeks of rates-are-going-to-the-moon concluded in a disorderly reversal late this week. The 10-year T-note fell from its run to 4.8 percent almost to 4.6 percent, which in turn pulled mortgages back from the 6.5 percent brink, now close to 6.25 percent.

The bond market is operating in a Ben Bernanke vacuum. The Federal Reserve Board chairman has thus far not said anything about Fed policy (he will speak on Monday night, content optional), and in a void of that kind the bond market tends to lose its marbles — descending into complacent snoozing, or panic at shadows.

Two weeks of rates-are-going-to-the-moon concluded in a disorderly reversal late this week. The 10-year T-note fell from its run to 4.8 percent almost to 4.6 percent, which in turn pulled mortgages back from the 6.5 percent brink, now close to 6.25 percent.

The bond market is operating in a Ben Bernanke vacuum. The Federal Reserve Board chairman has thus far not said anything about Fed policy (he will speak on Monday night, content optional), and in a void of that kind the bond market tends to lose its marbles — descending into complacent snoozing, or panic at shadows. As of last week, deep in the latter, the market had convinced itself that the Fed would raise its rate to 5.5 percent or beyond (after a certain hike to 4.75 percent on March 28), and the 10-year T-note would move quickly through 5 percent.

That panic may turn out to be correct, but in the near term everyone brave or frightened enough to short-sell the bond market had done so by Wednesday. Surprisingly pleasant data then caught the shorts: CPI in February rose a meager .1 percent. Year-over-year CPI is still a tad high at 2.1 percent, but that includes the shock interval to $60 oil. There is some hint of rising wages, but also an off-the-bottom rise in newly unemployed. February industrial production rose .7 percent, but the whole gain came from utility production boosted by high energy prices and some cold weather.

Perhaps the deepest bond fright in the last two weeks came from belief that the central banks of Japan and Europe would simultaneously tighten money, thereby pulling excess liquidity away from American bonds. There has been a rise in competing bond yields, but I think the markets are aware that the European and Japanese economies can’t take much tightening.

One aspect of former Fed Chairman Alan Greenspan’s genius was his willingness to talk: in a half-dozen pages of murky syntax he would bury a phrase or two that kept markets centered. As Bernanke will learn, the longer a chairman goes without centering commentary, the more explosive the consequences when policy change becomes evident. At this week’s end, the bond market has no clue whether the Fed is close to stopping, or has a long way to go.

The problem is not entirely the fault of Bernanke’s silent movie. Arguably the Fed’s most important single indicator is the bond market itself, and that indicator is busted. If long-term rates rise, it is an all-the-time, every-time indicator of rising expectations for inflation, warning the Fed that it may not be tough enough. If long-term rates fall — especially in relation to the Fed’s cost of money — it says inflation is under control and the Fed is too tight, maybe recession tight.

Today it is clear that bond-buying by our trading partners, recycling their export winnings, has downwardly distorted long-term yields. The 2006 flat and occasionally inverted bonds-to-Fed spread may be an indication of economic slowdown, but probably not; even if so, probably to an excess degree.

So, what to watch? Sez here: watch mortgage delinquency rates. Housing is clearly in a slowdown, and the consensus at the moment calls for a nice, polite, orderly and effortless landing. Regional pockets of trouble, widely scattered distress among ill-advised borrowers and self-deceived lenders, but nothing serious.

Watch delinquencies. Pimco’s mortgage-watcher says the last three years have been the lowest delinquency interval in modern times; a mere return to mean will be a shock. Perhaps the best way to measure delinquencies will be changes in mortgage underwriting standards, as I expect that Fannie and the credit derivative market behind all the modern bad ideas (sub-prime and 100 percent adjustables) will be very quick to back away at signs of real trouble.

As of now, mortgage underwriting standards are the easiest of my lifetime (30 years in the trade), and we have not received a single memorandum tightening ship.

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

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