|The bond and mortgage markets opened slightly weaker this morning after strong price gains yesterday. The 10 declined 97 bps to 1.72% down 0.9%, MBS prices +46 bps from Tuesday’s close. At 9:00 this morning the 10 down 22 bps its yield 1.74% +2 bp; 30 yr MBS price -11 bps from yesterday’s close. Not unexpected after the strong rally yesterday.
Interest rates fell yesterday on comments in the FOMC policy statement; the media focused its attention to the part of the statement that emphasized economic growth. That part that was translated to the Fed’s view that the economy is improving and that the Fed would begin increasing interest rates this year—-as long as the economic measurements improve. The bond market more concerned about the inflation outlook; “The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.”…“Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices”. The lack of any inflation, in fact declining inflation levels, isn’t a nod that economies are improving, just the opposite if it continues. The US is growing slowly, but growing, the rest of the world not doing so well. The FOMC statement said this; “This assessment (about when rates may be increased) will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” (parentheses mine). A currently bearish US and global stock markets and declining inflation readings here and globally drove interest rates lower.
So far this year, as we noted at the beginning of the year, market volatility continues to roil markets. Not tied solely to markets; volatility in the economic data is escalating. Dec durable goods orders, Dec retail sales, Dec new home sales all well off forecasts. This morning weekly jobless claims were expected to be down about 7K to 300K, as reported clams declined 43K to 265K the lowest level of claims since April 2000. Is that a real number, probably not as the report included the MLK holiday last week. There was little reaction to the decline prior to the stock market open at 9:30.
At 9:30 the DJIA opened +32, NASDAQ -5, S&P +1; 10 yr 1.75% +3 bp and 30 yr MBS price down 17 bps from yesterday’s close.
Dec pending home sales from NAR at 10:00; expected up 0.6%, declined 3.7%. New home sales in Dec up 11%. One more volatile report, the miss is sizeable and further clouds the reality of the housing sector as well as the overall consumer condition. Another consumer index from Bloomberg today was strong, the weekly index of consumer comfort climbed to 47.3 in the period ended Jan. 25 from 44.7, the biggest weekly advance since March 2010. A gauge of optimism about the economy has almost doubled since the end of September, while a measure of personal finances was the strongest since October 2007. All I take from these consumer gauges recently can be summed in one word—Gasoline.
Two Treasury auctions today. At 11:30 Treasury will auction $35B of 5 yr notes and at 1:00 $29B of 7 yr notes. Yesterday Treasury sold $26B of 2s that were very strongly bid as foreign investors continue to flock to US treasuries with our rates still higher than most other high quality sovereign debt.
We continue our bullish outlook for US interest rates over the longer outlook.Market volatility however will be extreme with rates at these historic lows. Difficult for investors and traders to become comfortable at current levels, be prepared for it if you float. It is a day to day trade, take advantage of the better levels, no matter how low rates fall potential re-financers and buyers should not try to pick the bottom; when this bullish run ends there will be a very rapid increase on the initial turn. Two weeks ago the 10 yield fell to 1.70% intraday before closing that day at 1.80%; in the following 3 days the 10 yield ran to 1.94% before declining again in five days to yesterday’s 1.72% close. MBS prices declined 151 bps before resuming the rally.
- 10 yr note: -9/32 (28 bp) 1.75% +3 bp
- 5 yr note: -4/32 (12 bp) 1.27% +3 bp
- 2 Yr note: -1/32 (3 bp) 0.52% +3 bp
- 30 yr bond: -19/32 (59 bp) 2.32% +3 bp
- Libor Rates: 1 mo 0.168%; 3 mo 0.252%; 6 mo 0.355%; 1 yr 0.622%
- 30 yr FNMA 3.0 Feb: @9:30 102.89 -17 bp (+22 bps from 9:30 yesterday)
- 15 yr FNMA 3.0 Feb: @9:30 104.97 +3 bp (+22 bp from 9:30 yesterday)
- 30 yr GNMA 3.0 Feb: @9:30 103.23 -22 bp (+19 bp from 9:30 yesterday)
- Dollar/Yen: 117.97 +0.43 yen
- Dollar/Euro: $1.1338 +$0.0051
- Gold: $1269.50 -$16.40
- Crude Oil: $44.72 +$0.27
- DJIA: 17,210.13 +18.76
- NASDAQ: 4623.11 -14.88
- S&P 500: 1998.74 -3.42