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MARKET WRAP – Wednesday August 26, 2009
Today’s 5 yr note auction was much better than recent 5 yr auctions. It had a yield of 2.494%, the cover was 2.51 to one ratio and indirect bidders took 56.4% of it. The previous 5-yr went off pretty ugly, with the fat tail, the issue was expected to hit from 2.635% to 2.65% but hit at a whopping 2.689% with so-so demand results, resulting in a big sell-off and was the third weak 5-yr offering in a row. much better today. The previous $39B 5 yr saw a 2.689% draw with a 1.92 bid-to-cover and a 36.7% indirect bidder participation take. The average cover since the start of 2008 has been 2.17 and the indirects take at 31.9%, for 2009 its been 2.22 and 41.9%.
Tomorrow concludes this round of borrowing with $28 of 7 yr notes. The 7 yr is kind of an orphan in the auction world as it hasn’t been around long, but traders are now looking for it to be taken down easier than just prior to the 5 yr results today. Last month the 7 yr was the best of the three auctions, according to what we heard the word went out from on high to bid up the 7 yr after the poor showings of the 2 and 5 yrs. Sounds rather ridiculous, nevertheless that is what is floating around.
July new home sales jumped a strong and surprising 9.6% and June new home sales were revised higher than originally reported. Robt Shiller of the Case/Shiller HPI said yesterday he didn’t think the evidence was there in home prices to imply the housing sector was turning the corner. Give him another piece of the puzzle and he is on board, saying today it may be over. No matter the very uncertain outlook that dominates about everything these days, the flip-flop is a thing of beauty to observe. For all the talk and forecasts (including our own) we are walking in the dark. Listening to CNBC and its bandwagon full of merry men and women, one would believe this is the best of all times, until there is a weaker than expected report, then CNBC drags out the bears—flip-flop.
Tomorrow the $28B 7 yr note auction at 1:00,and earlier, at 8:30 weekly jobless claims which are expected to be down 11K to 565K; if it hits there the lemmings on The Street will see it as good news. These days 550K+ new unemployment claims each week is good—Einstein said it best; everything is relative. Also at 8:30 Q2 preliminary GDP is expected to be -1.6% and lower than the advance Q2 GDP report last month.
Had to happen sooner or later; AMCs are out there fighting back. Here is an article today in the National Mortgage News. “Appraisal management companies are not to blame for real estate deals falling apart, the chief compliance officer for the nation’s first AMC said in an interview. Donald Blanchard of Lender Processing Services, the parent of LSI, an AMC which has been in business 25 years, said that while his company is “agnostic” concerning the Home Valuation Code of Conduct, it has decided to get out the word that AMCs are not the source of the problem. He cited statistics that show home values nationwide are down 15% to 20%; consequently property valuations would be lower. Furthermore, we are in a slow recovery process from the tumult of the last few years. Another contributory factor is that about 30% of home sales right now are from real estate-owned or distressed sales, which also bring down values. The company checked its data, he said, and found that 85% of the appraisals last year met the underwriting criteria for the loan to be made. Mr. Blanchard addressed some of the other myths HVCC opponents have been pushing. For example, supposedly AMCs use inexperienced appraisers. LSI has some 20,000 appraisers on its panel, with an average tenure of over 13 years. There is a requirement of three years experience just to get on the panel, he said. The next myth is that AMCs don’t pay fair fees. LSI’s fees have been stable for five years and its panel appraisers understand the value added by being a member. As for the argument of out-of-area appraisers, the No. 1 criteria used to assign jobs is proximity.” (Nat’l Mtg News)
At the end of the day markets are unchanged from yesterday; volume of trading in equities and rate markets is thinning as the calendar moves closer to Labor day. Add in that tomorrow there is a major golf tournament 15 minutes from Manhattan and it will likely be even less volume; those holding down the desk are instructed to do nothing to blow thing up.
The bellwether 10 yr note hit its lowest intraday yield since early July at 3.42%, it failed again to break through. Not yet a problem for technical traders, but one we will watch closely in the days ahead if it isn’t breached.
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