US interest rates continue to decline; slowly, but rates are falling. The reason; interest rates in Europe are falling on strong belief that the ECB will announce a major easing an at its next meeting. Mario Draghi has been specific about two things recently; the EU economies are teetering on deflation and the economies are approaching recession. Italy is in recession, even Germany reported Q2 GDP -0.2%. The decline in US treasuries these days are tied to sovereign debt in Europe where equivalent rates are a lot lower in Europe, driving investors to US bonds and in turn pushing MBS prices higher. Not a serious move in US rates so far but at these low levels any improvement is magnified by percentage changes. US treasuries are 80 basis points higher than the Group of Seven average equivalent rates. If investors want safe sovereign debt, the best place to go is to the US.
At 9:00 this morning the 10 yr down 3 bps to 2.36% and 30 yr MBS prices +18 bps. This afternoon Treasury will sell $35B of 5 yr notes; presently in the WI trading the rate is at 1.66%; we expect the demand will be strong for the note. Treasury will also auction 2 yr floating notes this afternoon. The improvement in US rates kind of faded going into the open of the stock market at 9:30.
At 9:30 the DJIA opened +26, NASDAQ +5, S&P +2; 10 yr note 2.37%. It didn’t take long though for the indexes to lose ground, at 9:40 the DJIA up 5 points (see below for the 10:00 am levels.
In Ukraine, although the markets are not as worried about it now compared to a few weeks ago, the fighting is continuing after the Russian and Ukraine leaders met yesterday and came away saying some progress was made. It apparently didn’t get down to troop levels though. Ukraine saying its troops killed 20 more separatists this morning.
No economic data today. The weekly MBA mortgage applications increased 2.8% frm the previous week. The Refinance Index increased 3% from the previous week. The seasonally adjusted Purchase Index increased 3% from one week earlier. The unadjusted Purchase Index increased 1% compared with the previous week and was 11% lower than the same week one year ago. The refinance share of mortgage activity increased to 56% of total applications, the highest level since March 2014, from 55% the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8.0% of total applications. The survey covers over 75% of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.
The next scheduled event to look at; at 1:00 Treasury will auction $35B of 5 yr notes and $13B of 2 yr floaters. The 5 is what we will focus on. We are looking for strong demand for the note, although it doesn’t directly impact the 10 or MBSs but it is a supporting element, especially if the demand is good. Tomorrow $29B of 7 yr notes will have a more direct bearing on the MBS markets.
No real movement in the MBS markets these days, but prices are slowly grinding higher; the treasury market is improving, the best we can say about the MBS market is that the decline in the rate on the 10 has kept mortgage rates from increasing. The 10 yr note and MBSs are gaining ground but the way lenders are pricing we are not seeing a lot of improvements frm day to day. This morning is a good example. Both markets continue to hold positive technical biases, the 10 much stronger.
CONTINUE TO FLOAT; NOT MUCH IN THE MBS MARKET BUT AS LONG AS TREASURIES ARE IMPROVING, FLOATING IS WARRANTED. STAY CLOSE THOUGH; MARKETS ARE STILL SUBJECT TO HIGH LEVELS OF VOLATILITY.
PRICES @ 10:00 AM
10 yr note: +8/32 (28 bp) 2.37% -2 bp
5 yr note: +532 (15 bp) 1.63% -3 bp
2 Yr note: -2/32 (6 bp) 0.52% +3 bp
30 yr bond: +20/32 (63 bp) 3.13% -3 bp
Libor Rates: 1 mo 0.156%; 3 mo 0.238%; 6 mo 0.329%; 1 yr 0.564%
30 yr FNMA 3.5 Sept: @9:30 102.80 +14 bp (+5 bp frm 9:30 yesterday) 4.0 coupon 105.86 +11 bp (+1 bp frm 9:30 yesterday)
15 yr FNMA 3.0: @9:30 103.45 +5 bp (+5 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Sept: @9:30 103.82 +16 bp (-6 bp frm 9:30 yesterday) 4.0 coupon 106.56 +11 bp (-2 bp frm 9:30 yesterday)
Dollar/Yen: 103.88 -0.18 yen
Dollar/Euro: $1.3175 +$0.0008
Gold: $1286.20 +$1.00
Crude Oil: $93.99 +$0.13
DJIA: 17,100.18 -6.52
NASDAQ: 4564.61 -6.02
S&P 500: 1998.87 -1.15