This morning’s opening put the 10 yr at its rock solid resistance at 2.48%, US stock indexes also rallied with another new high for the S&P index. No economic news to deal with today but Treasury will sell $35B of 5 yr notes at 1:00 this afternoon. Yesterday’s 2 yr auction was about average. By 9:30 the 10 had declined to 2.46%, the lowest level since last October. At 9:30 the 10 yr at 2.47%, DJIA opened -5, NASDAQ -1, S&P +1 bp; 30 yr MBS price +22 bps from yesterday’s 14 bp price gain.
The US bond and mortgage markets are rallying this morning on Ukraine and an increase in unemployment in the EU’s strongest economy; Germany. Not a huge deal on its own but with the ECB meeting next week and Mario Draghi’s statements last month that he would start another round of monetary stimulus, the news that Germany saw a few more unemployed than estimates kind of re-affirms the ECB will announce another round of QEs. The number of people out of work in Germany rose by 24K against forecasts of a decline of 15K. Still Germany’s unemployment rate remained at 6.7% the lowest level in 20 years. Business confidence declined in Germany and the German central bank, the Bundesbank, is saying the economy in Q2 will not match growth in Q1. The German economy expanded 0.8% in the first quarter, up from 0.4% in Q4 2013.
In Ukraine election results still keep the pot boiling. Yesterday it was reported by Ukraine that 30 Russian separatists were killed and many wounded when the government re-took the airport. In Russia today their media is reporting hundreds were killed. So far Putin is withholding direct comments but it is widely believed that he is continuing to threaten Ukraine to refrain from harming Russian people in Ukraine that want to re-join Russia. The situation is still volatile and is supporting safety moves to US treasuries where the rates are higher than EU rates in Germany and France. Ukraine’s government said it will press on with military operations against pro-Russian rebels.
The MBAs weekly mortgage applications were lower last week. Mortgage applications decreased 1.2% from one week earlier. The Refinance Index decreased 1% from the previous week. The seasonally adjusted Purchase Index decreased 1%. The Purchase Index was 15% lower than the same week one year ago. The refinance share of mortgage activity remained unchanged at 52% of total applications from the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.31%, the lowest level since June 2013, from 4.33%, with points decreasing to 0.15 from 0.20 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) decreased to 4.23%, the lowest level since June 2013, from 4.24%, with points increasing to 0.16 from 0.09 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.04%, the lowest level since June 2013, from 4.06%, with points decreasing to -0.45 from -0.39 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.42%, the lowest level since October 2013, from 3.43%, with points decreasing to 0.06 from 0.15 (including the origination fee) for 80% loans. The average contract interest rate for 5/1 ARMs decreased to 3.13% from 3.14%, with points decreasing to 0.19 from 0.29 (including the origination fee) for 80% loans.
Early this morning the US stock index futures were trading better; by 9:30 the indexes opened lower and are still declining. Not a huge deal at the moment but with the 10 finally breaking out of its recent range and moving lower it isn’t sitting well with equity markets. Our bullish outlook is now resuming the decline in rates; we noted yesterday that we were not putting too much emphasis on technicals even though the remained bullish; now that the 10 has cut through 2.50%, if it holds today the rates will continue to decline defying all those fence sitters and bearish bond investors. Tired of hearing that rates will go higher; yes they will---eventually, but not now. How much has been left on the table the last three weeks listening to those continuing to ignore the price action. We don’t like taking undue risks but we equally don’t like leaving money on the table.