Still stuck; going on to four days now the benchmark 10 yr note has been unable to break the granite wall to close at a new low yield this year while the fundamentals and global interest rate markets suggest it should be lower. Interest rates are falling like a stone in Europe, investors are increasing their holdings of fixed income investments, the US economy in Q1 up 0.1% and likely when the preliminary report is released later this month the growth will be negative, the stock market shaky at best, and Ukraine/Russia increasing in severity. Mix in that Q1 earnings reports so far have not been that strong, the housing sector declining recently; all of these issues have dropped rates to the lowest this year but are facing strong resistance at present levels. What will it take to break the 10 to new lows?
Until the stock market actually enters into a major correction (sell-off), or Ukraine/Russia trip into a wide-spread civil war, it will keep interest rates from moving below the granite wall. With little economic news this week the incentive to sell equities is not strong and geo-politics has calmed down a little in the last few days. Today Janet Yellen testified at the Joint Economic Committee (10:00), she reiterated for the umpteenth time that the Fed will keep interest low for “a long time” defined as mid-2015 or later. Later this afternoon at 1:00 Treasury will sell $24B of a new 10 yr note, the demand at current low yields will be a key to how interest rates react this afternoon. Another strong demand would be another feather in the cap for the interest rate outlook. Treasury long-term notes and bonds were the world’s best-performing government securities over the past month. Those are the short term issues; the much wider view in the markets is for interest to increase, most still hold that the 10 will climb to 3.25% or higher by the end of the year. The forecasts though have been declining, from 3.50% two months ago.
At 8:30 Q1 productivity expected -1.2%, declined -1.7%; Q1 unit labor costs were expected +2.8% but increased 4.2%. Q4 productivity was revised better, from +1.8% to +2.3%. The weak productivity in Q1 was primarily due to very bad weather in the quarter. No noticeable reaction to the report. The decline in productivity will surface later this month when the second look at Q1 GDP is reported; yesterday’s March trade deficit drop and the productivity this morning suggest Q1 revisions will show negative growth in the quarter; but that is yesterday’s news. Investors are looking forward to better times ahead after the weather wreaked havoc in Q1.
The DJIA opened +73, NASDAQ +2, S&P +6; 10 yr 2.60% +2 bp and 30 yr MBS price -3 bps.
Russia hasn’t lived up to its commitments in an accord signed in Geneva last month aimed at calming the crisis, the European Union president said today. he U.S. and its European allies urged Ukraine to proceed with its May 25 presidential election, rejecting Russia’s calls to postpone the vote as an offensive against separatists in the country’s east and south continued. Current news, Russia has asked separatists to delay a May 11th referendum vote.
Mortgage applications increased 5.3% from one week earlier. The Refinance Index increased 2% from the previous week. The seasonally adjusted Purchase Index increased 9% from one week earlier to the highest level since January 2014.
Despite the strong increase in the purchase market last week, volume continues to run 16% behind last year's pace." The refinance share of mortgage activity decreased to 49% of total applications from 50% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 9% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.43%, the lowest rates since November 2013, from 4.49%, with points decreasing to 0.21 from 0.38 (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 4.29%, the lowest rate since June 2013, from 4.37%, with points remaining unchanged at 0.14 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.13% from 4.17% with points decreasing to -0.03 from 0.10 (including the origination fee) for 80% loans.
Financial markets are likely to trade quietly until Yellen’s testimony and her responses to questions; she is scheduled to begin at 10:00 this morning. Next today, the 10 yr note auction at 1:00. We are becoming a little concerned that the resistance level on the 10 (2.58%) may not be breached; as each day passes and buying isn’t sufficient to break the granite wall traders are going to be increasingly concerned about their long positions.
RateSnapshot courtesy of TBWSratealert.com