Phoenix Mortgage Broker – Daily Interest Rate Update                   Friday, October 2, 2009

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Continue to float but stay tuned for rate alerts. Rate markets are overbought and unless the stock market really implodes today there is no more to the rally with Treasury auctions looming next week and near term technical overbought oscillators drawing attention.

Prior to the 8:30 employment report for Sept the 10 yr and mortgages traded +4/32 after the huge rate decline yesterday once the 10 yr broke its resistance at 3.28%. The DJIA at 8:15 was off 30 points. At 8:30 Sept non-farm jobs were reported down 263K against market estimates of -180K to -200K, the unemployment rate at 9.8% was in line and +0.1% frm August. Average hourly earnings in Sept were up just 0.1%, also seen as a negative to the economic optimism. August non-farm jobs were revised a little better, from -216K to -201K. The knee jerk reaction sent the 10 yr to +16/32 at 3.11% and mortgage prices +9/32, but by 8:50 the 10 yr backed down to +10/32 and mortgages +4/32.

The DJIA futures at 9:00 -124, 10 yr +14/32 at 3.13% -5 BP and mortgage prices +6/32 frm yesterday’s close. At 9:30 the DJIA opened -70, 10 yr +10/32 at 3.14% -4 BP, mortgage prices at 9:30 +7/32. (see below for 10:10 levels)

The reversal in the equity markets is finally taking hold after a month of waiting; even the most bullish investors are now having to face the reality that the equity markets may have over-shot. That said, listening to various guests on CNBC after the employment report suggests the bulls are not going to give up easily. Lot of chatter coming from the NYSE floor that traders are excited about the turn lower in the stock market, as have noted previously traders say they want a decline in the stock market so they can buy at lower levels. As far as we are concerned, talk is a very cheap commodity; we do not take those thoughts seriously. Changes in sentiment can occur rapidly based on unfolding data. At the end of the day, the basic question in the markets now is whether or not we will have a double dip recession? The bond market is leaning that way while the equity markets are tilted toward no double dip; will likely to increase market volatility over the next few weeks.

At the low yield this morning the 10 yr this week was down 21 basis points and mortgage rates down 16 basis points. A lot of day ahead, short term technicals are now reading overbought after the rally yesterday and the action so far this morning.

Bernanke yesterday said the expansion may not be strong enough to “substantially” bring down unemployment, indicating the central bank will be slow to drain the trillions of dollars it’s pumped into the economy. With the Fed expected to not initiate any tightening moves for most of 2010 and inflation off the radar at the moment, the fixed income markets are benefiting in a major short covering move after the strong resistance at the 3.25% yield level fell yesterday (10 yr treasury) triggering huge stop loss selling. Carrying on with the rally so far this morning on the weaker than expected employment data at 8:30; mortgages are riding the wave so far this morning.

Additional bad news for the economic outlook this morning from the Labor Dept; its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 824,000 jobs in the 12 months ended March 2009. The data currently show a 4.8 million drop in employment during that time.

At 10:00 August factory orders concluded the data this week; expected to be +0.5%, orders were down 0.8%; August durable goods orders revised to -2.6% frm -2.4%.

next week Treasury will auction a total of $71B in 3s, 10s and 30s on Tuesday, Wednesday and Thursday ($39B of 3 yr notes, $20B of 10 yr notes and $12B of 30 yr bonds); Monday Treasury will also auction $7B of 10 yr inflation-indexed notes. Demand for US debt has been very strong from foreign and domestic investors in the past three months. This time the auctions will face the lowest yields in six months if rates hold current levels.

By 10:00 the rally early ended; the 10 yr unchanged mortgages unchanged. Not likely to see much movement through the rest of the day. The stock market is slowing finding a little traction from the worst levels at 9:00 this morning.

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