Rate Snapshot: Bond, mortgage markets continue to hold bullish measurements

by MPA03 Nov 2014

By David Shirmeyer, CEO at Sigma Research

This is a big week for economic measurements. It is employment week, but between now and Friday when employment hits a number of key data points and a plethora of Fed officials to muddy the waters. In the meantime, some reports from the global markets: China’s Purchasing Managers’ Index was at 50.8 for October, government data showed on Nov. 1, trailing the median estimate of 51.2 in a Bloomberg News survey and below September’s reading of 51.1. China is slowing, the second largest global economy.
 UK manufacturing grew more than thought; Markit Economics said its Purchasing Managers’ Index climbed to 53.2 from 51.5 in September. A final reading of the EU region’s manufacturing PMI stood at 50.6. While that’s up from a 14-month low of 50.3 in September, it’s below a 50.7 estimate released on Oct. 23. The ECB, still stumbling along, trying to boost the EU economy will announce its latest monetary initiatives on Thursday. Speculation is that the ECB will disappoint by not adding to its meager stimulus announced a month ago.
Recent data out implies there is still a very strong demand for U.S. treasuries even with the end of the Fed’s QE3. Bloomberg data shows the demand for U.S. debt is about three times the amount of debt sold so far this year. One reason; our rates are the highest and best in the world when safety of investments is the prime influence. Yields on the 10-year note, the benchmark for trillions of dollars of debt securities, have fallen about 0.7 percentage point to 2.33% since the Fed started tapering in January. Demand at U.S. Treasury auctions, where $1.85 trillion of interest-bearing government bonds have been sold, is on pace to be the third highest since 1992. Strong demand is keeping U.S. rates low compared to what most thought at the beginning of this year.
At 9:30 the DJIA opened unchanged as did the other two major indexes, the 10 year note earlier this morning was down 3 bps to 2.32% but at 9:30 back to unchanged at 2.34% and MBS prices also quietly unchanged. The employment report on Friday and the two ISM reports are keeping markets still so far.
Is doom and gloom around the corner for U.S. and global economies? Stop reading now if you think I have any idea. Over the weekend I spent a few hours reading a lot of forecasts that are not what anyone wants to see or hear. The most interesting, the “Warren Buffett Indicator,” also known as the “Total Market Cap to GDP Ratio,” is breaching sell-alert status and a collapse may happen at any moment.
According to one article Warren Buffett is rumored to be preparing for a crash. I see at least 20 various pundits a week with their newsletters, commentaries and forecasts; over the last six weeks there has been an increase in dire predictions. Admittedly, those I am referring to have been preaching doom and gloom for the last two years and all that has occurred is stocks have climbed; the economic data has improved, so we have to take it with a winked eye.
Nevertheless now that according to what I read, Buffett is leaning to the bearish side, adding more interest for me. Not wanting to cry wolf, but there is doubt that there are more analysts and pundits coming out with predictions that are not pleasing. Maybe one reason the bond markets are not going higher in rate like the bullish outlook would suggest.  
Two economic reports later; the October ISM manufacturing index, expected at 56.0, the index jumped to 59.0, the same read we saw in August before the September decline. New orders index increased to 65 from 60 and the employment component at 55.5 from 51 last month. A solid report against forecasts. Sept construction spending was a big disappointment though; spending was expected to have increased 0.6% from August’s decline of -0.8%, as reported spending declined again, -0.4%. Construction spending accounts for good paying jobs, not good to see a two-month decline.
Technically, the bond and mortgage markets continue to hold slightly bullish measurements; not much but holding. Last week the DJIA ran up 585 points yet the yield on the 10-year note increased just 7 bps and MBS prices were down only 16 bps all week. Over the past seven sessions there has been little change in MBSs and treasuries; this week may also be quiet until Friday when October employment hits. News flash just hitting; first-time home buying is the lowest in 30 years.
PRICES @ 10:15 AM
10 year note:                    -5/32 (15 bp) 2.35% +1 bp
5 year note:                      -4/32 (12 bp) 1.64% +3 bp
2 Year note:                     -2/32 (6 bp) 0.52% +2 bp
30 year bond:                   -3/32 (9 bp) 3.07% +0.5%
Libor Rates:                 1 mo 0.156%; 3 mo 0.232%; 6 mo 0.328%; 1 year 0.555%
30 year FNMA 3.5 Nov:   @9:30 103.34 -3 bp (-7 bp frm 9:30 Friday)
15 year FNMA 3.0 Nov:   @9:30 103.65 -5 bp (-5 bp frm 9:30 Friday)
30 year GNMA 3.5 Nov:  @9:30 104.37 +6 bp (-6 bp frm 9:30 Friday)
Dollar/Yen:                  113.94 +1.62 yen ( the  lowest since 2007 as Japan is increasing monetary stimulus)
Dollar/Euro:                $1.2483 -$0.0042
Gold:                          $1169.30 -$2.30
Crude Oil:                  $79.90 -$0.64
DJIA:                          17,368.20 -22.12
NASDAQ:                   4640.85 +10.11
S&P 500:                    2017.07 +0.98