Interest Rate Review – Thursday August 20, 2009

There was hardly any volume in the financial markets today. Treasuries, MBSs and the stock market saw no real volume as the summer doldrums continue. Tomorrow we expect volume levels to be even thinner. The rate markets did manage more improvement today mostly coming this afternoon. The technicals for MBSs and treasuries continue to be positive for the outlook in the next few weeks, but rates still have dependency on how the equity markets trade. Lots of talk today about why the stock market continues to climb up while most market participants are scratching heads wondering why the anticipated correction hasn’t occurred. We submit it because everyone expects it, markets at times refuse to follow instructions.

 
Treasuries got some lift with the Obama administration now saying the 2009 deficit will be ‘only’ $1.58T, not $1.85T as had been the outlook. Most of the reduction comes from not using all the money thought to be needed to bail out banks, and money not yet used from the stimulus plan announced last spring ($787B). Less deficit is less need for Treasury borrowing. MBS buying looks good; investors are slowly coming around to the realization that buying MBSs provide a better return and are about as safe as treasuries. The MBSs being originated these days are probably the safest in years; very tight underwriting on each individual loan, appraisals reflecting the recent decline in prices, how much better can it get? Buying at the bottom. Recently China has indicated it may buy more MBSs in lieu of treasuries, we suspect more sovereigns and large investors will also see the light over the next year.
 
Treasury announced the details for next week’s borrowing; the same total as last month, $109B. $42B of 2 yr notes, $39B of 5 yr note and $28B of 7 yr notes; on Tuesday, Wednesday, and Thursday respectively next week. Recently demand for treasuries has been solid, markets believe it will continue next week. 
 
This morning the Philly Fed business index was a positive surprise; markets were expecting it to be better than July but still under zero, it came at +4.2. It is the first above zero for months and adds support to the view the economy is slowly coming around. That is all but job creation; job losses continue and will do so for the remainder of the year. Once jobs stop losing ground we don’t expect many of them will return. The unemployment rate is likely to remain high for the next few years as many jobs lost are not going to return. 
 
Tomorrow the only data is at 10:00; July existing home sales are expected to be up 2.2% frm June. Also at 10:00 Bernanke will deliver the opening address at the Jackson Hole symposium. Most world financial managers are there to catch fish and the latest plans to revive economies. That said, there is a big gap of consensus among western leaders on how to do it.
 
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