Wednesday, September 16, 2009   Interest Rate Update for FHA, USDA loans

A better start this morning;

at 8:00 the 10 yr note yield had slid back to 3.41% frm yesterday’s close at 3.46%; the DJIA index traded +48. At 8:30 August CPI, expected to be +0.3% and the core +0.1%, hit at +0.4% overall and when food and energy are stripped out +0.1%—–generally in line with forecasts. Not much change on the initial reaction as inflation isn’t on the radar these days. Yr/yr the overall CPI -1.5% after bumping to -2.1% in July yr/yr. The yr/yr core -1.4%. The low inflation readings are one fueling factor for the low interest rates; longer term investors (insurance companies, pension funds and others whose focus covers years more than days) are now getting real interest rate returns of 4.90% when the negative inflation is added to the equation. At 8:40 the 10 yr note traded +14/32 at 3.41% -4 BP; mortgage prices were +5/32 on the session, the DJIA futures were +45. At 9:30 the DJIA opened +36; treasuries and mortgages earlier were strong but they are caving kin at 9:45 AM, 10 yr and mortgages were unchanged (see below for 10:00 levels)

The continual decline of inflation expectations will continue to add value to treasuries and thus to mortgages. Still thinking the 10 yr note has a good chance to run to as low as 3.00% by yr end, pushing mortgage rates to under 5.00%. PIMCO the largest bond fund in the world is adding to its treasury purchases, now the highest since Aug 2004. But PIMCO is lightening up on MBSs base on the return in treasuries slightly better than mortgages.

It is now “official” the recession is over; Bernanke blessed it yesterday, Warren Buffet this morning. Not many left out there now that believe we are n for a double dip. While overwhelming consensus is that the economic decline is behind us, there is equally an increasing belief the future will be slow growth and continued high unemployment. A consumer less economy can only mean slow growth; however slow is good for the rate markets, slow generally keeps inflation pressures low.

At 9:15 August industrial production, expected +0.7%, came at +0.8%; July industrial pro. was revised to +1.0% frm 0.5% originally reported. Also at 9:15 factory usage for August, expected at 69.1% was 69.6%, July usage was revised better, to 69.0% frm 68.5%; still very low factory use but a step in the right direction.

Earlier at 9:00; Treasury reported net outflows of $97.5B in July, a bigger negative flow than expected. Inflows of capital in July were just $15.3B from +$90.2B in June. On that news the dollar lost more ground.

Nothing else on the calendar today for economic reads. The bond and mortgage markets remain technically positive, yesterday the 10 yr moved to 3.4%, 4 BPs from its key support area at 3.50%, last week it dropped to its key resistance at 3.28%. Comfortable in that range at the moment. Tomorrow Treasury will announce the details of next week’s auction (2 yr, 5 yr and 7 yr notes), in the past two months the total has been $109B; so far foreign investors have continued to buy with strong demand, traders are not nearly as concerned with supply these days as they normally are.

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