THAT NASTY “I” WORD…INFLATION was the buzz in the trading pits on Friday. Although mortgage interest rates remained relatively stable on the week, hot talk was splashed around after the Consumer Price Index was reported. Prices in January rose much faster than expectations, and this could be an early indication that inflation may be on the rise. Inflation causes Bonds to lose value over time, and therefore make Bond prices decline. When Bond prices decline, mortgage interest rates increase, so signs of inflation may mean that higher rates could be around the corner. Bond Traders also know that this is just the kind of signal that the Fed is watching for as they contemplate when to raise short-term interest rates. On Friday, three separate Fed speeches noted a positive outlook for job growth, but a continuation of the company line that the Fed can remain “patient”.

More chatter in the pits, as Traders heard rumors and rumblings that the Bank of Japan may let off on their buying binge of US Bonds. In an effort to support the US Dollar from falling against the yen, the BOJ has been a huge buyer of US securities. Why are they buying? A strong yen against the US Dollar makes Japanese goods more expensive to purchase in the US and hurts the Japanese economy, so the BOJ has kept a constant bid in Bonds, helping to support the price. If their appetite subsides, Bonds could lose value faster than a "South Beach" dieter and mortgage interest rates would increase. The bond market caught a little glimpse of what would happen once the Bank of Japan stops buying US dollars. On Friday, Japan raised their terrorist threat level to the highest since 9/11. Normally one would think that this uncertainty would have helped mortgage bonds and lowered interest rates. In this case, the US Dollar rallied and left no reason for the Bank of Japan to buy - so Mortgage Bonds were left to stand on their own legs…Well, American Idol legend William Hung could have put together a better performance on Friday, as Bonds closed at their worst levels of the week (for more on William, see the Economic Calendar section below). Overall, mortgage interest rates were unchanged to up very slightly for the week.

VARIETY IS THE SPICE OF LIFE…BUT HOW SPICED UP IS YOUR INVESTMENT PORTFOLIO? YOU MIGHT BE SURPRISED…SO YOU WON’T WANT TO MISS THIS WEEKS MORTGAGE MARKET VIEW, WHERE WE HIGHLIGHT AN EASY TO USE TOOL THAT CAN HELP YOU ENSURE THAT YOUR INVESTMENTS ARE WELL DIVERSIFIED.

Technically, Mortgage Bonds are looking a little "shaky" heading into this week. Take a look at the chart below, as there are a number of interesting characteristics present. Bonds were unable to crack through some pretty tough overhead resistance during the past week. After several unsuccessful attempts to close above this level, Bonds finally succumbed to the pressure and sold off on Friday.

Further lending to this bearish scenario is the presence of a negative stochastic signal shown at the bottom of the chart. The stochastic oscillator is an accurate indicator showing when a market is turning direction. It has been extremely reliable in the past, and right now it is indicating that the bond is likely to going to move lower, resulting in rates going higher.

Bottom Line: unless there are surprises this week with unfavorable economic reports or talk from the Fed, mortgage interest rates should edge a little higher.

Variety…the so-called “spice of life”. But have you taken a look in your own back pocket lately? Variety is crucial when it comes to investing for the long term. Diversification in your investment portfolio can help boost your returns while adding safety by protecting against undue risk.

Everyone has heard the expression “don’t put all your eggs in one basket”. This is sound investment advice, but is often not as easy to do as it sounds. Why is portfolio diversification elusive for even savvy investors? There are several reasons, which include taking the time to do the research required to map out a diversified set of investments. Getting assistance from a professional Financial Planner can be a great benefit, as they can offer important guidance and help you make smart choices that spread…and limit your investment risk.

Many investors choose mutual funds because they contain a basket of individual securities. Even more diversity can be obtained by investing in different mutual funds. BUT…even this apparently “fool-proof” plan for diversity can fall short of its objective. Why? Because there can be a huge amount of overlap in the investments that these mutual funds make. This overlap can be surprising, and can result in your investments being overly concentrated in one area or sector. There is a fantastic tool to help you protect yourself from this, which is located at Morningstar.com. It is called the “Instant X-Ray Tool”. Here you can review the overlaps between your mutual fund investments and see if you need to do some house cleaning. Best of all it is free!

Here is the link to this FREE tool: MMGW link to X-Ray.

Even the best plans need to be reviewed. Once you have made sure your investment portfolio meets your objectives, risk tolerance levels and is well diversified, you still need to review the allocation of your assets on a regular basis. For example, while you may have started out with 15% of your assets in health care – if that sector goes on a tear, it may then represent 35% of your holdings, which may be more exposure to one sector than you are comfortable with. This exercise in portfolio maintenance is called asset allocation rebalancing, and should be done at least once a year.

Take a look at your investments, consult a professional Financial Planner, and don’t be afraid to “spice it up”!

Let’s take a look at the news coming down the pipe this week. Housing Reports are always of interest, but usually won’t be big market movers in terms of rates. Initial Jobless Claims will catch some attention on Thursday, as all eyes are watching for continued strength in employment. Friday brings us the important Chicago PMI Regional Manufacturing Index, which is an opinion poll of Chicago’s leading purchasing managers as to strength in the manufacturing sector. The bond market will also take interest in what a number of Federal Reserve members will have to say this week during scheduled speaking engagements, and the calendar is busier than usual this week…

This Tuesday, Chairman Greenspan speaks on Government Sponsored Enterprises. Wednesday, Greenspan will testify on Economic Outlook and Fiscal Issues, while Fed Presidents Poole and Pianalto speak in North Carolina and Ohio, respectively. On Thursday, Fed President Bernanke speaks on the 'Euro at Five' in Washington, D.C.

ALL THIS WEEK: William Hung will discuss his lack of formal training, giving it his best and having no regrets at all, at www.williamhung.net. William is the hottest craze in the country, but should have no meaningful impact on mortgage interest rates.

Remember, as a general rule, weaker than expected economic data would indicate the economy is not improving as quickly as expected, and could cause mortgage rates to improve. Positive data would indicate a strengthening economic climate, and could cause mortgage rates to gradually climb higher.

For the week of February 23 – February 28, 2004