Rate Snapshot: Low rates may lead to volatile week in bond, MBS markets

by MPA01 Dec 2014

By David Shirmeyer, CEO at Sigma Research

Last Friday in reaction to OPEC’s meeting on Thursday that ended with no cuts in production, U.S .interest rates fell in a strong move lower (the 10 lost 7 bps in rate). The trade was thin with many taking the day off, nevertheless the 10 had broken out of its 20 day range on Tuesday setting up another leg lower in rate. The price of crude is continuing to fall with OPEC and the US shale producers about to face off in a price war. Energy prices have emboldened consumers to spend more, at least that is the assumption dominating investors currently; we will get a quick report card on that view over the next few weeks.


Last week trading was spotty with many off Wednesday afternoon and out altogether on Friday. This week most will answer the roll call. The week’s headline is November employment data on Friday, in the meantime the two ISM indexes,  Nov auto and truck sales, Q3 productivity and unit labor costs, and the Fed’s Beige Book. Also this week there quite a few Fed officials on the circuit; so many comments and speeches recently that traders are less interested in what comes out in their talks.


Friday the 10-year fell to its lowest level in six weeks. US interest rates still the lowest level in almost six weeks, still the highest yielding among the Group of Seven countries. The average yield among securities in the Bank of America Merrill Lynch World Sovereign Bond Index dropped to 1.59% at the end of last week, the lowest level since May 2013. A measure of U.S. inflation expectations, called 10-year break-evens, dropped to the lowest level in three years. For all of the concern about inflation, finally markets are realizing that with global economic growth softening almost daily there is no reason to be concerned about inflation. Economists and strategists in a Bloomberg News survey estimate the U.S. 10-year yield will end the year at 2.5%, down from a forecast of 3.44% at the beginning of the year; most still don’t get it; that rates are not going to increase. Look for economists and analysts to back off the idea the Fed will begin increasing rates next year; more likely now not until 2016.


Chinese manufacturing slowed last month and fewer shoppers showed up for Black Friday sales events. China’s official measure of manufacturing activity slipped to its lowest showing since March while a private gauge compiled by HSBC and research firm Markit touched a six-month low, according to data released Monday. The index at 50.3 is the lowest since last March. Consumer spending tumbled an estimated 11% over the weekend from a year earlier, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up. Going to the mall didn’t happen, but we will need to wait for more data on internet shopping. Consumer spending fell to $50.9B over the past four days, down from $57.4B in 2013, according to the NRF.


At 9:30 the DJIA opened -47, NASDAQ -11, S&P -8; 10 yr 2.16% -1 bp and 30 yr MBS price +6 bps frm Friday’s close but up +29 bps frm 9:30 Friday morning.


The only data today; at 10:00 the Nov ISM manufacturing index was expected at 58.0 frm 59.0 in October;  as reported 58.7; new orders component at 65.8 frm 66.0, the employment component at 55.5 frm 54.9. Fractionally better but no positive reaction kin stocks as the indexes continued to decline; the MBS prices actually improved a little, frm +6 to +11 bps.


This Week’s Economic Calendar:


            10:00 am Nov ISM manufacturing index


            10:00 am Oct construction spending (+0.5% frm -0.4% in Sept)

            No time; Nov auto and truck sales (16.5 mil units)


            7:00 am weekly MBA mortgage applications

            8:15 am Nov ADP private jobs (+225K)

            8:30 am Q3 productivity and unit labor costs (productivity +2.4%; unit labor costs -0.1%)

           10:00 am Nov ISM services sector index (57.3 frm 57.1 in Oct)

           2:00 pm Fed Beige Book


           8:30 weekly jobless claims (295K -18K frm last week)


           8:30 am Nov employment data (unemployment rate unch at 5.8%; non-farm jobs +230K, private jobs +225K; avg. hourly earnings +0.2%)

                        Oct US trade deficit (-$41.0B)

          10:00 am Oct factory orders (-0.3%)

          3:00 pm Oct consumer credit (+$16.8B)


So far not a lot of improvement this morning; that should be expected after the big declines in rates last Friday; the 10 fell 7 bps, the biggest move in rate since Oct 15th. MBS prices on Friday increased 36 bps. Today we are not looking for much more decline; what we want to see is the bond and mortgage markets hold most of their gains Friday. The bond and MBS markets are in good technical shape now, we expect rates will decline more as long as the economic news here and globally continue to slow. The week may be volatile however; with rates at these lows there isn’t much more to expected based on the present underlying fundamentals.



PRICES @ 10:15 AM

10 yr note:                    +2/32 (6 bp) 2.16% -1 bp

5 yr note:                      +3/32 (9 bp) 1.47% -1 bp

2 Yr note:                     +1/32 (3 bp) 0.46% -1 bp

30 yr bond:                   -4/32 (12 bp) 2.90% +1 bp

Libor Rates:                 1 mo 0.155%; 3 mo 0.233%; 6 mo 0.326%; 1 yr 0.564%

30 yr FNMA 3.5 Dec:   @9:30 104.36 +6 bp (+29 bp frm 9:30 Friday)

15 yr FNMA 3.0 Dec:   @9:30 104.18 -1 bp (+9 bp frm 9:30 Friday)

30 yr GNMA 3.5 Dec:   @9:30 105.12 +4 bp (+30 bp frm 9:30 Friday)

Dollar/Yen:                  118.02 -0.61 yen

Dollar/Euro:                $1.2491 +$0.0039

Gold:                           $1183.40 +$7.90

Crude Oil:                   $66.63 +$0.48

DJIA:                          17,740.61 -87.63

NASDAQ:                   4746.00 -45.63

S&P 500:                    2053.18 -13.48