The bond and mortgage markets opened better this morning,still reacting to the Federal Reserve’s surprise yesterday saying the FF rate would stay at 0.00% to 0.25%, clear out to the end of 2014. Prior to yesterday the Federal Reserve was saying mid-2013. The motivation is that the central bank has lowered its forecasts for U.S. growth this year and next. Bernanke apparently is more concerned about growth that he was six weeks ago. The recovery seen so far he considers anemic with unemployment to remain high for another two years, the housing sector showing little in the way of stabilizing let alone improving much, and he is very likely believing Europe will decline into another recession and that there will be defaults on a lot of the debt piled up.
The reaction to yesterday’s FOMC Statement and Bernanke’s press conference was swift;U.S. Treasuries that were looking weak rallied taking the 10-Year Note to 2.00%, down -6 bp yesterday on the close, but at 1.92% on the initial reaction. MBS prices spiked initially then backed off but still a very nice close, up +16/32 (.50 bps). This morning treasuries are better as are MBS prices; at 900am the 10-Year Note at 1.98% (-2 bps) and MBS prices up +8/32 (.25 bps). U.S. stock indexes at 900am: DJIA up +65; all major equity markets in Europe rallying on the Federal Reserve’s rate surprise. At 930am the DJIA opened up +44, the 10-Year Note up +12/32 to 1.96% (-4 bps) and MBSs up +10/32 (.31 bps).
At 830am Weekly Jobless Claimswere in line with forecasts, up +21K to 377K; Continuing Claims up +88K to 3.554 mil. December Durable Goods Orders were much stronger than estimates. Expectations were for an increase of 2.2%, reported up 3.0%. The more significant excluding transportation orders were expected up 0.7%, reported up 2.1%. November Orders were revised higher, from 3.8% to +4.3%, excluding transportation from 0.3% to +05%. The two reports added a little more strength to the stock indexes in the futures markets.
More data at 1000am December New Home Sales were expected to increase 1.5% to 320K annualized units, actually declined 2.2% to 307K. Based on sales there is a 6.1 month supply and for all of 2011 sales were down 6.2%. December Leading Economic Indicators were expected to be up +0.7%, reported up +0.4%, November revised to up +0.2% from +0.5%. No immediate reaction to the data.
This afternoon at 100pm the Treasury will complete its auctions with $29B of 7-Year Notes. Yesterday’s 5-Year Note auction met with solid demand.
The slightly bearish bias in the bond and MBS markets turned quickly yesterday on the Federal Reserve’s announcement. Prior to the announcement we were thinking the 10-Year Note would climb to 2.15% but go no further; the highest it got was 2.09% on Tuesday. Now the obvious questionis, how low will the 10-Year Note yield go based primarily on the Fed holding the FF rate at current lows until the end of 2014 and how low willmortgage rates go now? It is unlikely U.S. interest rates will decline to new lows. At this point we expect the wider trading range will continue with the possible low on the 10-Year Note at 1.80% and mortgage rates tied to a 25 basis point range in rates. The Federal reserve is worried about the U.S. recovery and that Europe will continue to decline with eventual debt defaults in Greece and other EU countries. Until there is another Europe shock it is unlikely that U.S. rates will push to new lows. It will take a few days for traders and investors to assess the message sent yesterday from the Federal Reserve when the Committee made such an unusual move.
