Treasuries and MBSs opened a little better this morning, ending days of price declines. The equity markets were trading lower early, implying a weak open. There are no economic reports today, just the $35B 2-Year Note Auction. Last month’s 2-Year, 5-Year and 7-Year Note Auctions were well bid however the 3-Year, 10-Year, and 30-Year Auctions didn’t get the demand traders were expecting. Now with rates a little higher, demand will likely be better. The 2-Year Note has been unchanged for the last few weeks at 0.24% and that is likely where the bid will be this afternoon at 100pm.
This evening the President will deliver his State of the Union address. Being an election year the address will carry political overtones and not likely to generate much interest in the financial markets. He will lay out what he calls a “blueprint” for revitalizing the economy, emphasizing a rebirth for U.S. manufacturing, bolstering domestic energy production and training workers. The FOMC Meeting begins today, concluding tomorrow with the policy statement and Bernanke’s press conference after the meeting. There’s speculation that the Fed will launch another quantitative easing move. Every time the FOMC meets the idea surfaces. With the Q4 GDP expected up 3.1% on Friday, almost doubling the growth in Q3, there isn’t much rationale for another easing unless it is targeted to purchasing more MBSs to keep mortgage rates from increasing.
In the never-ending soap opera known as Europe’s debt problems,yesterday markets were buoyed by reports out of Greece that talks were going well to arrive at a plan to forestall a Greek default. Today there’s not much optimism with a stalemate between regional policy makers and Greek bondholders over how to resolve the nation’s debt crisis. Bond holders are not willing to take the huge haircut demanded. European finance ministers balked at putting up more public money for Greece, calling on bondholders to provide greater debt relief. Europe’s equity markets are weaker today, leading the U.S. market lower this morning. The saga continues: On the positive side Spain’s 2-Year Note fell 5 bps to 3.12% as the government sold 2.51 billion euros ($3.3B of 3-Year and 6-Month Bills, meeting the maximum target for the sale.
At 930am the DJIA opened down -67, the 10-Year Note at 2.05% was unchanged but MBS prices rose +6/32 (.18 bp). Prior to 930am the 10-Year Note held a 5/32 gain with its yield at 2.04%.
Although the mortgage market is trading better this morning, the bellwether 10-Year Note is still struggling. Even with equity markets weaker the 10-Year Note is not moving up in price. Technically the 10-Year Note is slightly bearish on the near term outlook. While we continue our outlook that rates won’t increase much unless there is renewed safety buying on news out of Europe, there isn’t any motivation to drive rates back down. Given two years of fumbling and meetings in Europe to resolve debt issues, U.S. markets will remain vulnerable to any significant news from the region. Presently markets are not as fearful of defaults or bank failures alleviating the need to park money in U.S. treasuries…the key word is “presently”.
