Well normally I would be telling everyone about this big day ahead of us this Friday with the release of May’s NFP report. However, with the crisis in Europe, I am beginning to wonder if it really matters anymore. We are experiencing a huge flight-to-quality trade as investors are flocking to the safety of US treasuries and the German Bond markets. How are these numbers to show you that the world is very concerned about the spreading debt crisis in the EU zone…a 1.65% US 10yr which is an all-time low and a 1.28% 10yr German 10yr Bund.

I know this story is getting old but it is so incredibly broad and complex not to mention purely horrific so it will consume the financial markets for the near to intermediate future. So while I always respect the importance of domestic economic numbers, especially the NFP report, I must say that in short time the focus will be right back on the EU crisis.

Where do we start with highlighting the problems? Greece?? Yesterday’s news that is far from resolved. Italy?? They had an extremely bad bond auction yesterday. Spain?? In the midst of a huge banking crisis that will require the help of the European Central Bank (ECB). Ireland?? Their banks also need more capital to survive. You can pretty much throw a dart at the European map and hit a country that is on the brink of major financial collapse if they do not get some help. Where does the ECB draw the line? I would not want to be the one making these decisions and I think very few would like that gig.

In the meantime, we in the US are totally at their mercy. US stocks are getting spanked again after a few days of veiled optimism. Commodities are down. All this is pointing to a major “risk-off” trade that everyone involved in the financial markets are participating in. So we as originators will benefit with lowers bond yields and lower mortgage rates. Understand, however, that it is coming at the expense of a global economic crisis that will lead to a global economic slowdown. It has the makings of being a deep slowdown that may take years to reverse.

Like I say a lot…this is historic textbook stuff that will be reviewed and analyzed by some very smart folks for many years to come.

So today we not only get to close out the week and month but it is the start of the Summer of 2012. What are we going to see this summer? Is it going to be explosive with all the turmoil in Europe or is it going to be a dragged out slow death like an episode of the Pauly D Project?? Well time will tell but we have a top 10 list of “The Events Most Likely to Happen in the Summer of 2012”. Here we go but please keep in mind that this is being conceived as I type it:

#10. Mark Zuckerberg  decides to buy-back all outstanding shares of Facebook because his new bride tells him that she wishes everything was like it was in the good old days.

#9. Astoria takes Greece’s place in the EU just to keep that Mediterranean flare in the group

#8. Because the Yankees are running out of closers they turn to Martin Brodeur thinking a save is a save regardless of sport

#7. Wells Fargo decides being the biggest mortgage lender in the US by about 35% is not enough so they make a run at buying the Fed

#6. We see the Mets on an episode of Pawn Stars trying to sell the homerun apple so they can make the July 15^th payroll

#5. The Situation gets arrested during the new season of the Jersey Shore for assaulting another arrogant guido only for the case to be dismissed because they realized he just punched a mirror

#4. Mitt Romney buys the naming rights from Macy’s for the July 4^th Fireworks display

#3. A scandal erupts in the Jets camp when Mark Sanchez and Tim Tebow are spotted taking the Fire Island ferry to Cherry Grove

#2. Obama decides at the last minute to not run for another term so he can join the new cast of Saturday Night Live

#1. Oprah agrees to bailout Greece

So all that great vibe that came out of the G8 Summit from last weekend regarding the backing of Greece staying in the EU, well let’s just forget that it even happened. Let’s just chalk it up as a tax-payer retreat for some of the biggest leaders in the world. Like we reported on Monday morning, the stock markets were feeling a little bit better about the Greece saga and had a positive close on Monday. Then we saw some follow thru yesterday until the former Prime Minister of Greece Lucas Papademos dropped a few headline tape bombs by saying that Greece has effectively no choice but to implement the austerity plan (which the Greek people strongly oppose…Google “Greece riots”) or exit the euro zone.

Obviously this caused a shift out of riskier investments like stocks into the safe haven of US treasuries which has pushed the yield down to 1.72% on the 10yr. It was @ 1.81% prior to Papademos’ comments. The US is not the only place for a safe haven trade… check this out. Germany auctioned off 2yr bonds yesterday that had a 0% coupon with an average yield of .07% and investors could not get enough!! It sort of reminds me of the scene in Scarface where Tony Montana is charged 10% by his bank to store his cash. Different reasons but ironic none the less.

So now the fear is back into the markets and stocks so far today are down about .5% and money is going back into bonds. It is hard to believe that there will be a big shift in this trade until a more definitive action happens with Greece which looks to be close to happening but certainly is not happening soon enough. We are looking at least at a few months of this drama just specifically for Greece. Then the EU will have to focus on the contagion which is a major concern and could bring us back to the panic of March 2009.

Therefore I expect the story all summer to be about the EU with a sprinkling of how it is starting to impact the US economy. It obviously is having a negative impact as wealth gets diminished with the declining stock markets and the low to non-existent returns on savings. There is a small ray of light in all this which is falling oil prices but it is always funny how that takes a while to translate to lower gas prices at the pump. Maybe we should have a congressional investigation into that as opposed to one for a stupid trader at Chase. Funny how that has become old news like we said it would a week ago and I believe the world is better for it.

It is Wednesday and yes that means that we have the Weekly MBA Application Survey and yes it is strong. With the drop in bond yields we again have record numbers. Here are the highlights:

• Applications were up 3.8%
• The Refinance Index increased 5.6%. This is the 3^rd consecutive weekly increase and the highest level since 2/10/12.
• The Purchase Index decreased 3.0%
• The refinance share increased to 76.6% which is the highest since 3/2/12
• The FHA purchase share decreased to 36.2% which is the 2^nd lowest % since 3/27/09. Has HUD gone too far with the MIP increases??
• The following rates are all-time lows with the exception of the 5/1 ARM…
• 30yr conforming was 3.93% with .39pts
• 30yr FHA was 3.73% w/.57pts
• 15yr was 3.26% w/.42pts
• 5/1 ARM was 2.83% w/.42pts

We are starting off the week pretty much unchanged in the bond markets as the 10yr is sitting comfortably at 1.73%. With a light economic calendar today, I do not expect much volatility and expect the bond market to take its lead from the battered stock market. While we in the bond world wonder if yields will ever go higher, I am sure the stock folks are wondering if/when stocks will finally close up on the day. It has been a brutal month for stocks and I hate to say that one of those enormously annoying sayings of “sell in may and go away” is holding true at least for now. Therefore given the noticeable drop in stocks it becomes a story and when it becomes a story then the bond market participants pay attention.

So far this morning stock indexes are up about .25% which is keeping the bond markets from gaining any positive momentum. So why is the stock market up and inversely the bond markets down a little bit? We can point to the news that came out of the G8 Summit from this weekend at Camp David. The G8 includes the economic leaders of the world with the exception of China (just a small non-participant!). The group includes the US, UK, France, Italy, Germany, Japan, Canada (I guess they cannot always be neutral) and Russia. Their comments out of the summit could be considered bullish for the global stock markets and bearish for interest rates because what they agreed upon, in theory, would help spur global economic growth. Always remember the old bond adage of what is good for the world is bad for bonds. Here are a few of the highlighted discussions that came out of the Summit:

• They backed Greece staying in the EU. Now this is a prime example of where the devil will be in the details but they did give Greece a vote of confidence. Whether their backing is totally political as opposed to realistic remains to be seen. Obviously it is in everyone’s best interest for a healthy Euro with the exception of a US citizen traveling overseas and realizing that our US dollar has little purchasing power. Therefore I do not think anyone expected the G8 to come out of this and say that they were going to give Greece the boot. However, it is giving the stock markets some degree of reassurance which at least is temporarily halting the slide.
• They stated another obvious opinion which is that they need to contain the Eurozone contagion. So if the Greece efforts fail then they need to make sure that Spain, Portugal, Ireland and others do not follow. Again this is what you would expect to hear but apparently stock investors liked hearing it.
• They also put raising pressure on Iran by signaling their readiness to tap into emergency oil stockpiles quickly this summer if tougher new sanctions on Tehran threaten to strain the oil supplies. This is something we all like to hear because everyone hates paying a small fortune to fill up their tanks. By taking a unified stance on doing what it takes to keep the flow of oil supplies at acceptable levels regardless of middle eastern conflict, the G8 can keep the drag of high oil prices at bay which will help with economic growth. Again another much needed shot in the arm for the stock markets.

One last note because I know a lot of people are interested in the Facebook story… so far today it is down almost 11% in-spite of the stock markets up about .25%. Not a good sign as reality starts to set in to how this company will satisfy stockholders with growth and earnings. However, I do not believe anyone will shed a tear for Mr. Zuckerberg.

A happy Friday to everyone and all-in-all it has been a good week in our world. The bond markets have had a steady grind towards lower rates even though we are starting the morning down from yesterday’s close. However when yesterday’s close marked the lowest close in the history of the 10yr then I find it a little selfish to complain about a small sell-off to start the day. We did close yesterday at the all-time low of 1.70% just narrowly breaking the 1.71% mark. We are currently at 1.74% and would not be surprised if we continue to trade above the 1.70% low.

It is very easy to be numb to all this “all-time low” or “lowest in the history of the survey” type of comments but if you take a step back you really learn to appreciate the fact that we are living in the midst of a historical time in the financial markets. Thankfully these all-time whatever occurrences are to our advantage. They will be writing textbooks (well at least the downloadable version) about this for many years to come. So while we can never correlate excitement in the bond markets with a James Cameron movie it is pretty cool stuff non-the-less.

The funny thing about yesterday’s historic close is that it is being overshadowed by this little company that is having its IPO today…Facebook. This is all the financial markets have been talking about lately. Lord knows it is a nice change from the problems in Greece and the losses on the Chase trading desk which by the way are now up to over $3billion. So today we can all be small owners of Mark Zuckerberg’s little invention that he created in his dorm room about 8yrs ago. I give the guy a world of credit given that the only thing I was talking about in my dorm room was a strategy to get beer money for the next Happy Hour. Facebook has the floor all to itself today as the economic calendar is blank so I do expect the bond markets to be relatively quiet and will probably take its lead from the direction of the stock markets which are up anywhere from .25-.5% depending on the various indexes.

Have a good weekend.