We’re a day early because of a little local weather problem, but there’s nothing in a second 3-foot snowstorm in one week to compare with the trouble brewing in the bond market.

The 10-year T-note blew above 4.7 percent this morning on generally healthy economic data — that’s up from the 4.43 percent low three weeks ago, and will shortly put mortgages at 6.25 percent and at risk for a sustained move upward.

The data since mid-month have not been all that strong, but enough to change the bond-market psychology from a debate about hard versus soft landing to soft landing versus no landing at all. Even if the economy does stay a tad soft, Gross Domestic Product growth in the 2 percent-something range, on current data there is no reason to expect the Fed to cut its rate from 5.25 percent, and that means that 10-year bond yields near 4.5 percent have been a tad silly.

As regular readers know, the New Year ceremony at this rag is to recite Peter Drucker’s dictum: “Nobody can predict the future. The idea is to keep a firm grasp of the present.”

Three items dominate the present — housing, risk and Iraq — and the word “spillover” is the key to each.

Housing has been the center of expectations for a deep economic slowdown and the equally deep 2006 anticipatory decline in long-term rates. The financial markets have made two large errors in these expectations: they have assumed that housing behaves like financial markets, and that housing weakness would do great harm to the rest of the economy.

Price corrections in financial markets happen fast, but housing moves at the pace of municipal snow removal. Expectations today that housing has bottomed are just as poorly founded as the one six months ago that we would be buried in foreclosures by now. The thing to watch for: the development of a loan-default credit-crunch spiral — that’s the only means for housing to get ugly enough for recession.

The second error has been the spillover one: surely, the markets believed, the end of the big price gains would shock homeowners out of consumption and into saving. Surely all those ex-Realtors, ex-mortgage lenders, ex-construction workers, ex-Home Depot employees, furniture, rug, and appliance makers … surely those job losses would tip over the economy. Uh-uh. Nope. Not enough people involved, and the ones who have lost jobs have readily re-deployed.

The one housing spillover at work: equity withdrawal is diminishing — a certainty in a flat-price environment — and that will tend to dampen the economy.

Risk is an easy thing to measure in money land: you get paid for risk by higher return. Except … not now. Returns for risk over time or for credit or for liquidity are as low as they ever get, and all prior similar episodes have ended unhappily. Although that painful back-look has 100 percent accuracy, there is no way to know when risk premia might return to reasonable levels, or what might trigger risk re-pricing.

Iraq’s spillover into financial markets has thus far been small. However, the cost of the venture is going to begin to matter: in current operations, in deferred spending on equipment and maintenance, in manpower expansion, and in the need to cease starving other ventures (Afghanistan). Two choices: borrow, or raise taxes.

The feedback potential from Iraq into risk is now substantial. Never before in our history have policy convictions been so deeply held and so scattered with stakes so high, nor — rather worse — with so little probability of accurate anticipation of future consequences of any line of action.

The riches pouring into markets and paychecks today are the return from the millennial expansion in global trade, and that trade depends on stability.

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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