It wasn’t a good last week in the bond and mortgage markets withinterest rates up on increasing optimism that the U.S. economy can improve even in the face of Europe’s slide, and reduced need for safety in U.S. treasuries. The 10-Year Note yield increased 15 bps last week and mortgage rates were up 8 basis points. This morning early prices continue to fall as early activity pointed to a better open in the equity market. At 830am the 10-Year Note was at 2.06%, up 3 bps from Friday’s close. MBS prices at 830am were down -5/32 (.15 bp). At 930am the DJIA was expected to open a little better, opened down a fraction (-8), the 10-Year Note traded at 2.07% -14/32 (-4 bps) and mortgage prices were dowm -8/32 (.25 bp).
There are no economic releases this week until Wednesday. The week is focused on the Federal Reserve Open Market Committee (FOMC) meeting that starts Tuesday and ends Wednesday with the policy statement. The Treasury will auction its monthly ration of $99B in 2-Year, 5-Year and 7-Year Notes. The Eurozone of course is always in play these days and any significant comments from leaders of the EU, ECB and IMF will get traders’ attention. Technically, the bond and mortgage markets, after last week’s selling, are now slightly bearish. We talked about how the rate markets were losing momentum for the past two weeks, the break came last week.
“How high will interest rates climb” is the question now facing investors and traders. We don’t believe rates will increase much, at worst the 10-Year Note could increase to 2.15% but should hold. On the opposite side, it is very likely that the lows in rates have been put in place. As long as the U.S. economic outlook is improving and there are no actual defaults in any Euro debt, there is little reason to justify the 10-Year Note going below 2.00% and mortgage rates at their lows of a few weeks ago.
Europe’s finance ministers are meeting today in Brussels,trying to advance plans to craft a long-term plan to tackle the region’s debt crisis, as banking and government negotiators continue trying to reach an agreement that will lighten Greece’s debt burden. There has been progress over the past couple of weeks where Greece and private bondholders said they made progress in talks over the weekend in Athens. Finance Minister Evangelos Venizelos said before today’s meeting that Greece is prepared to wrap up the private-sector debt swap on schedule. “We have a very constructive cooperation with the private sector,” Venizelos told reporters in Brussels. “We are ready to finalize the procedure on time.”
This Week’s Calendar:
01/24/12: 0100pm $35 billion of 2-Year Note Auction
01/25/12: 0700am MBA mortgage applications
1000am December Pending Home Sales (-1.0%)
November FHFA Housing Price Index (-0.1%)
0100pm $35 billion of 5-Year Note Auction
0215pm FOMC policy statement
01/26/12: 0830am Weekly Jobless Claims (+23K back to 375K)
December Durable Goods Orders (+2.2%, ex auto sales +0.7%)
1000am December New Home Sales (+1.5% to 320K units (annualized)
December Leading Economic Indicators (+0.7%)
0100pm $29 billion of 7-Year Notes Auction
01/27/12: 0830am Q4 Advance GDP (+3.1%)
0955am Universtiy of Michigan Consumer Sentiment Index (74.2 from 74.0)
The bond and mortgage markets have been losing strength for two weeks as indicated in past commentary. The 10-Year Note won’t find much support until it hits 2.15% (now at 2.09%). There aren’t many momentary concerns to hold treasuries against Europe. U.S. economic outlook is improving thereby removing another support forrates. There is some talk that the Federal Reserve may announce it will increase purchases of mortgageBacked Securities (MBS) to keep mortgage rates low, but as long as Treasury rates increase the best we can expect is that mortgage rates won’t increase as much, but will increase. While we do not expect rates will fall again to the recent lows we are equally not expecting rates to move radically higher.
