Bond Brief: Soft Sell

Record low inventories have spurred production. The Federal Reserve is closely watching for evidence of tight resource utilization, which could spur economic growth and inflation.

Last Friday, the National Association of Purchasing Management in Chicago said that its regional index on manufacturing last month rose to its highest level since December.

Fed officials have made it clear that future rate decisions will be data-dependent, but their comments are still closely tracked by the market for clues about future rate decisions.

Kansas City Fed President Thomas Hoenig, Dallas President Richard Fisher and Richmond's Jeffrey Lacker will all speak tomorrow. Fed Chairman Ben Bernanke and New York Fed President Timothy Geithner will deliver speeches on Wednesday.

Last Friday, Hoenig said that economic growth has been robust and that the economy "appears to have rebounded fairly well."

However, he added that it looks like the Fed is approaching the upper end of its neutral range for rates, meaning that it is within the top end of a range that will contain inflation without restraining the economy.

Interest rate futures show 100% odds that policymakers will raise the fed funds rate to 5% at their next meeting on May 10. The odds of a move at the following meeting in June are nearly 40%.

Most economists believe that the central bank's 15 consecutive rate hikes, which have brought the fed funds rate to 4.75% from 1%, will put the brakes on economic growth by making it more expensive for consumers and businesses to borrow and spend money.

For example, the real estate market has been on fire for six years and has been a major driver of economic growth. Mortgages rates track the 10-year note yield, and as it gets more expensive to borrow money to buy a home, the sector should cool. Any weakness in the sector is being closely watched for the ripple effect it will have on consumer spending and overall economic growth.

To wit: Mortgage rates have been edging higher since the beginning of the year, with Freddie Mac (FRE Quote) reporting that the average rate on 30-year fixed-rate mortgage rose to 6.35%, up from the prior week's 6.32%. In the year-ago period, the 30-year mortgage averaged 6.04%.

The latest rate hike "raised the expectation that inflation may be more of a threat than was previously thought, and that kind of thinking promotes upward pressure on mortgage rates like we saw across the board this week," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.