I have held rate locks into this morning to confirm that the 10 yr had held its technical resistance, but warned not to hold locked loans taken yesterday on the re-price improvements. We will float again to start the session but will likely lock at the end of the session if not before. The 10 yr and mortgages are likely to edge lower in price today and into the employment report—technical selling in a well defined range. Keep alert for our alerts.

Treasuries and mortgages started weaker this morning, as we noted in the 4:30 comments yesterday, the 10 yr note hit its solid resistance at 3.28% and once again (so far) has failed to crack it. Mortgages and the 10 yr still are technically positive but the 10 remains in its 3.50% to 3.28% range. At 8:30 the 10 yr  -7/32 at 3.30% and mortgages -5/32; the DJIA futures -6. At 9:00 the 10 yr -13/32 to 3.33% +5 BP, and mortgage prices -7/32; the DJIA up 10 points. At 9:30 the DJIA opened +4, 10 yr -13/32 and mortgage prices -6/32. (see below for 10:10 levels)

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Yesterday the stock market got a little too excited about the acquisition by Xerox of Affiliated Computer Services; the excitement based on the view that M&A and acquisitions are signs businesses are about to invest more, leading to the thought that the economic outlook is improving. Many traders and market participants were off yesterday for Yom Kippur increasing market volatility. This morning though, in early activity the stock market in pre-market trading, while slightly weaker is holding most of the gains of yesterday. The remainder of the week will focus on the unfolding economic releases and Friday’s Sept employment figures.

At 9:00, the first of two reports today; Case/Shiller home prices for July, expected to be a little better than June at -14.2% frm -15.44%, prices were down just 13.3% the smallest decline in prices in 17 months; 17 of the 20 areas covered showed an increase, led by a 3.1% jump in Minneapolis and a 2.9% increase in San Francisco. Las Vegas suffered the biggest one-month decrease at 1.9%. The reaction sent treasury and mortgage prices lower. Increasing home prices, while likely an anomaly as July generally has increases, combined with the 10 yr failing again at is resistance (3.28%)  flipped short term sentiment; likely the note will track back to 3.41% now, its fist level of support.

At 10:00, a few minutes ago, Sept consumer confidence from the Conference Board, expected at 57.0 frm 54.1 in August, was a little weaker at 53.1 and gave a nice boost to the bond and mortgage markets, the 10 yr prior to the 10:00 release was off 16/32, mortgages off 8/32. After the lesser confidence the 10 and mortgages climbed to -8/32 and -2/32 respectively. The stock market traded better until the report then rolled over a little.

Weekly Johnson Redbook retail sales were down 2.2% at a year-on-year pace that extends an improving trend, but still declining. The report said low temperatures helped move seasonal items and that Halloween sales are off to a good start. Vehicle unit sales, to be posted Thursday, will be the next key piece of information for the September retail sales report.

Short term the run is likely over; the 10 yr went where we expected and failed where it has on three previous occasions at 3.28%, a rock of resistance. Still the 10 and mortgages hold slight bullish bias but not in the near term. Since late July the bellwether 10 yr has traded in a 23 basis point range, mortgages about the same. Last week’s FOMC meeting statement said the Fed would keep short tem rates low for quite awhile as the economic recovery is fragile. Since then however various Fed officials have been speaking more hawkishly, saying repeatedly that the Fed will act aggressively and with surprise when it has to tighten. Likely a plus for the long end of the curve in that investors can find solace that the Fed will not let inflation get a toe hold.

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The rate markets are testing key support levels; still holding but looking more vulnerable with today’s price action. Suggest locking and not floating over the weekend.

The bond and  mortgage markets started badly early this morning and didn’t let up all day. Beginning to get a little concerned that lour forecasts for 5.00% mortgage rates may not happen anytime soon. Markets were treated to comments all through the week that the recession is over; Bernanke and Warren Buffet got the ball rolling at mid-week and added more conviction that worst is behind the economy. Even though Bernanke and many others have repeatedly said growth will be slow and likely the “new normal” will keep unemployment high for the next couple of years. The question now for fixed income markets is how much more money will be pulled out of notes and bonds to find a new home in the equity markets.

Today was a mirror image of yesterday; strong price improvements on Thursday were all erased today, suggesting that the 10 yr may be getting long in the tooth at these levels. Still holding support today but with $112B of treasury auctions next week rate markets may not be able to withstand the pressure if equity markets keep running higher.

On the week; rate markets were hanging tough until Friday’s heavy selling forced rates higher on the week, the first week n the past four rate markets will lose ground. The 10 yr note yield increased 12 BP, mortgage prices on the week, 30s -10/32, FHAs -4/32, 15 yr conventionals -4/32. The mortgage market performed better than treasuries this week. The DJIA +315, NASDAQ +51, and the S&P +25 on the week.

Next week; The FOMC meeting concludes on Wednesday at 2:15 with the statement. Nothing on the economic calendar until Thursday and Friday; weekly claims, August existing hm sales, August new home sales, August durable goods orders. Treasury supply will dominate; over the past three months investors have been bidding well for treasuries at the auctions, foreign buyers continue to support the US growing budget deficits. Will the demand continue to remain strong; traders are not likely to bet on it ahead of the auctions that begin next Tuesday.

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Friday, September 18, 2009

Treasuries and mortgages opened weaker this morning,

no follow-through from the strong rally yesterday. Pushing prices lower, the stock indexes started better pointing to a firm opening at 9:30. At 9:00 the 10 yr note -8/32, mortgages prices -5/32. At 9:30 the DJIA opened +52, the 10 yr -11/32 and mortgages -8/32 frm yesterday’s close. (see below for 10:00 levels)

There are no economic reports to deal with today; it is however a day that may see increased volatility with all financial options expiring as well as futures contracts, quadruple witching.

Yesterday’s better headline economic reports are getting the credit this morning for the better open in the equity market, but as we noted in yesterday’s afternoon report the interior data on the Philly Fed business index, weekly jobless claims, and housing starts were not so strong. Nevertheless, with Bernanke, Warren Buffet and about every analyst now convinced the recession is over, investors are continuing to buy equities. As long as the economic outlook remains positive lower interest rates will be difficult to achieve. Not much concern in the markets yet that the recovery will likely be at a snails pace compared to other recessions in the past 50 yrs.

Given the lack of follow-though frm yesterday so far this morning the rate markets may be vulnerable to more selling next week ahead of Treasury’s $112B of supply (2 yr, 5 yr, and 7 yr note auctions). Technically the 10 yr note and MBSs are still holding key moving averages and chart support levels, (3.50% for the 10 yr note and 100.03 on the Nov FNMA coupon now at 100.07). Still will hold to our slightly bullish outlook for rates but time and price equation is working against us; unless the 10 yr note and mortgages gain traction in the next few sessions both may turn technically bearish. The 10 can’t sit at this level for much longer before traders will turn more bearish. Mtg rates hovering at 5.00% levels have to break below it or that market also will give up the fight.

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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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