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"IT'S A BEAUTIFUL THING, DIVING INTO THE COOL CRISP WATER." Olympic Gold Medalist Dawn Fraser. Diving may be a beautiful sport at the Olympics, but it's not a beautiful thing to watch in the Bond market. And that's exactly what happened last week, as Bonds dove to their worst levels so far this year.
So what caused this belly flop to occur? Once again, inflation was the big culprit. While Bonds and home loan rates did begin the week in rally mode after the Federal Reserve announced that it authorized Fannie Mae and Freddie Mac to borrow directly from the Central Bank if they need additional capital, this confidence boost in the markets was short lived on the heels of important inflation reports.
On Tuesday, the Producer Price Index (PPI) report, which measures prices of goods at the wholesale level, revealed that the year-over-year PPI soared in June, marking the highest year-over-year rate since 1981. Also on Tuesday, the Retail Sales report, which measures the total receipts of retail stores, showed that retail sales increased much less than forecast. This may mean that the boost in sales received from the tax rebates may already be fading as consumers are focusing on paying for essentials...something that Wednesday's news seemed to confirm.
What was Wednesday's news? The important Consumer Price Index (CPI) report, which measures prices paid by consumers like us. It showed that prices overall are up 5% from a year ago, the biggest year-over-year rise since 1991. This probably comes as no surprise as you look at your own monthly expenses, particularly the amount you're likely spending these days on groceries and at the gas pump.
Bond prices and home loan rates continued to worsen through the week as no other news or reports could help them shift course. With inflation and tough overhead technical resistance proving to be strong competitors against any improvement, home loan rates generally ended the week around .5 percent worse than where they began. | 
