Long term treasuries and MBSs opened better this morning;
mostly because of technical factors, the bond and mortgage markets are momentarily oversold. Selling 10 yr notes now has lost a little momentum with traders, if a trader wants to sell 10s he/she can get a better sell point next week after some consolidation and some price gains. The long end isn’t quite as fundamentally bearish as the short and middle of the curve are now. The Fed is going to increase the FF rate next week, of that there is no debate at the moment, so the 5 yr and 2 yr note rates are moving up in rate at a pace faster than the long end. The long end of the curve has a little fundamental support from the easing of inflation expectations and US rates are 4much higher than rates in Germany, Japan and other sovereign debt providing demand from foreign investors. That said, the 10 and MBS markets remain bearish overall; we expect improvement in both primarily because of being oversold now---too much price decline in too short of a time frame.
The single most concerns for investors in fixed rate investments is inflation. Inflation erodes the return on investments where the rate is fixed for a long period; not new news but it should the reprised now with comments frm the FOMC statement on Wednesday. At the previous FOMC meeting in July the statement indicated concern that inflation was approaching the Fed’s 2.0% target; at the meeting Wednesday the language was changed to imply concern inflation was slipping somewhat. That change does add a modicum of support for the long end (10s and 30 yr MBSs). Not a change that will launch any strong rally but enough to lessen the outlook for how high long term rates may increase in the near term. Mix that with the oversold momentum in the bond market and selling may slow now. Will the 10 turn bullish? Not likely, to do so we would want to see the 10 below 2.52% and that isn’t in our wheel house now.
The DJIA opened +63 at 9:30, NASDAQ +16, S&P +7; the 10 at 2.61% -1 bps and 30 yr MBS price +9 bp frm yesterday’s close and +25 bps better than at 9:30 yesterday. Alibaba will begin trading this morning; the IPO price at $68.00 but no one will be able to get it at that price when it actually opens.
The only data today; at 10:00 August leading economic indicators, expected +0.4% after increasing 0.9% in July, as reported up just 0.2%. July revised to +1.1% frm 0.9% originally reported. No reaction.
Voters in Scotland have chosen to stay in the U.K. by a convincing margin, a major relief for a British government prompted to make big concessions to hold together the 307-year-old union.
Although we did expect some improvement today in the MBS and treasury markets, and explained our thoughts above; do not read too much into it. The bond and mortgage markets are bearish now and most traders are still betting rates will move higher. Floating now should not be the plan unless you are in a position to profit frm taking the risk (those that fund their loans that can profit or lose on momentary price swings). The only technical reason to float is that the markets are oversold; there is no change at the moment in the wider outlook that rates will continue to move higher. Until the 10 can close below 2.52% the bond market will remain bearish. Respect the Pizza.
PRICES @ 10:15 AM
10 yr note: -2/32 (6 bp) 2.63% +1 bp
5 yr note: -1/32 (3 bp) 1.84% +1 bp
2 Yr note: -1/32 (3 bp) 0.58% +1 bp
30 yr bond: -4/32 (3 bp) 3.36% unch
Libor Rates: 1 mo 0.153%; 3 mo 0.233%; 6 mo 0.330%; 1 yr 0.585%
30 yr FNMA 3.5 Oct: @9:30 101.66 +10 bp (+26 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Oct: @9:30 102.84 +2 bp (+17 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Oct: @9:30 102.86 +7 bp (+19 bp frm 9:30 yesterday)
Dollar/Yen: 108.88 +0.19 yen
Dollar/Euro: $1.2850 -$0.0073
Gold: $1223.00 -$3.90
Crude Oil: $92.72 -$0.35
DJIA: 17,326.46 +60.47
NASDAQ: 4606.77 +13.35
S&P 500: 2017.53 +6.17