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Treasury yields which had declined earlier in the week jumped 15 basis points on Thursday before settling back to last Friday’s close of 3.79 percent. Some economists have expressed concerns that the market cannot absorb next week’s record supply auction and that yields will be driven back down. Recent reports indicate that the recession may be coming to an end and that inflation is under control. Mortgage rates have declined slightly over the last week and are not expected to change significantly in the near future.

The yields on 10-, 7- and 5-year treasuries fell six to ten basis points last week, their first weekly loss in over a month (3-year yields remained unchanged). Ten-year yields had risen nearly 130 bps since the Fed announced its $300 billion Treasury purchase program on March 18, driving up commercial borrowing costs. While some analysts see increasing yields as a sign of disapproval for the government’s deficit spending, others see it as a vote of confidence for the recovery. Investors tend to move funds out of the safety of government debt in times of growth, seeking higher returns in other assets. Lower Treasury yields can lead to lower mortgage rates, but they also indicate investor fear in the market.

In another positive read for the credit markets, the ninety-day LIBOR rate fell to a record low of 0.62 percent.

10-year Treasuries pushed up over 3.4 percent in reaction to concerns that Treasury auctions resuming next week will push the debt to record levels, and threaten the U.S.’s AAA credit rating. Many banks are raising capital through equity sales in order to repay the TARP loans that they believe are holding down their stock valuation. Agency multi-family mortgage rates moved up 20+ basis points while portfolio lender rates remain relatively unchanged.

The stock market continued its rally this week as investors exhibited relief that the “Stress Test” results addressing the health of the nation’s leading banks showed that they should be able to withstand the economic slump. Also, less-than-expected job losses for April may be a sign that the recession is nearing bottom. 10-year Treasury rates increased about 13 basis points as demand fell due to the large movement of capital back into stocks.

After navigating troubled waters at the beginning of the year, the banking industry showed signs of recovery after FASB modified its definition of “fair market value” as it regards securities. The yield on the 10-year note rose five basis points to 2.88 percent on Friday. Ten-year yields have traded between 2.45 percent and 3.05 percent since late January as the Fed’s debt purchase program offset concerns about the government’s plans to borrow record amounts. Experts expect the yield on 10-year Treasuries to range between 2 and 3 percent over the next 12 months.

The 90-day LIBOR rate is dropping at the fastest pace since January as bankers gain confidence that the worst of the financial crisis is over. According to analysts, the declines reflect a reduction in systemic risk. The rate fell to 1.10 percent on Friday, down three basis points for the week.

The Dow Jones Industrial average made its best five-week gain (22 percent) since 1938, riding better than expected reports from Wells Fargo and other banks. The rebound resulted in a decrease in demand and a 15 basis point increase in yields for Treasuries and swaps. This 15 basis point increase was correspondingly reflected in the agency multi-family rates.

The U.S. unemployment rate soared to 8.5 percent last month – a 25-year high – indicating that the economy remains trapped in a recession. In as much as the jobs report was about what economists had predicted, investors reduced their emphasis on safety last week, causing Treasury sales to slump. The 10-year note yield rose 9 basis points to 2.87 percent, the 7-year yield was up 10 basis points to 2.35 percent, the 5-year yield climbed 6 basis points to 1.86 percent, and the 3-year yield inched up 4 basis points to 1.33 percent.

The cost of borrowing in the interbank market also edged lower as risk appetite improved following the positive outcome of the G20 summit, leading to further improvement in the money markets. As a result, concerns over counter-party risk have eased and swap spreads have improved. The 90-day LIBOR, seen as a key gauge of the effectiveness of the Fed’s monetary policy, dropped 5 basis points to 1.161 percent from Thursday’s 1.166 percent.

Commercial mortgage lending rates are virtually unchanged from one week ago. Early in the week, the government announced plans to rid banks of toxic assets by providing attractive equity and debt assistance to induce investors to purchase over $1 trillion in illiquid bank assets and troubled securities. The market reacted dramatically with the S&P 500 surging up 3.76 percent fueling a third consecutive week of gains. Reports of a 22 percent increase in new housing starts in February coupled with the Federal Reserve’s first purchase of long-term Treasuries helped maintain the market rally.

The Federal Reserve’s announced plan to buy as much as $300 billion of long-term U.S. Treasuries had an immediate effect on financial markets. Treasuries rose sharply last week with the yield on the 10-year note falling 32 basis points to a two-month low of 2.61 percent. The 7-year yield followed suit, dropping 32 basis points to 2.17 percent, as did the 5-year yield closing at 1.64 percent. The 3-year yield fell “only” 21 basis points to 1.21 percent. After the Fed’s announcement, the 90-day LIBOR rate fell six bps to 1.23 percent, its seventh decline. The Fed’s purchase of Treasuries is part of a strategy to lower interest rates for residential mortgages, but should have little effect on commercial mortgage rates which are expected to continue trending upward.