The first quarter is behind us and the stock market continued the trend of a robust rally that started in 2009.  The rally has been fueled by a recovering manufacturing sector, realigned corporate balance sheets and strong reported profits.  The Dow hit the 11,000 mark the 2^ndweek of April and has created some corresponding excitement.  There are some trends however that are keeping the euphoria in check.  The volume of trades being carried out and the relatively low number of participants is reminiscent of the "phony rallies" of the 30's during the Great Depression.  There are several factors that are different than the Great Depression but analysts are concerned that the market could be due for a correction in 2010.  The housing market continues to struggle along with construction and commercial real estate (approximately 20% of gross GDP).

The interest rates for mortgage backed securities and corresponding long term interest rates have started to creep up as the massive government purchase program ended at the end of March, 2010.  Analysts have predicted higher rates as we enter the later quarters of this year but much will depend on the movement of money in and out of the equity markets.  The higher yields that will be offered for long term bonds will boost investment and re-invigorate interest in the security of mortgage backed investments.  The mortgage industry has continued to tighten standards to acquire financing as government agencies and lenders continue to improve the quality of their loan portfolios.  There will be plenty of new foreclosures in 2010 as the lagging job market and increasing rate adjustments to ARM products will continue to challenge homeowners.

There have been predictions of rates getting to around the 6.0% mark and stabilizing based on better investment yields and quality that will bring back foreign and private capital.  The equity markets will have a direct impact as a continued rally in the stock market will most likely draw dollars away from bonds and a setback will bring investors back to a "flight to quality" that mortgage backed securities will again represent.