Mortgage Market Snapshot & Rate Lock Advice for Friday 4-16-2010

Treasuries and mortgages started firm this morning and were boosted more at 8:30 when Mar housing starts and permit data were reported. Mar starts were expected to have increased 5.7%, as reported the increase was 1.6% to 626K annualized units, the highest level since Nov 2008. Although Mar starts were less than expected there was a large revision in Feb, from -5.9% originally reported to +1.1%. Of the four regions only the South showed an increase (+18.2%); all other regions were lower (-8.3% in the NE, -28.4% in the Midwest, -2.1% in the West). Building permits were thought to increase 2.3% but jumped 7.5% to 685K units and the highest permit issues since Oct 2008; the Midwest had an increase of 17.6%, the South +18.4%, the NE -19.5% and the West -6.7%). Construction of single-family houses decreased 0.9% to a 531,000 rate in March, while permits increased 5.6%. Work on multi-family homes, such as townhouses and apartment builders, climbed 19% to an annual rate of 95,000. New home construction rose 20% in March from the same month last year. Permits were up 34% in the 12 months ended in March. Since most of the increases in starts were multi-family and only the South had increases traders see it as a weak report.

At 9:00 this morning the 10 yr note +7/32 at 3.81% (at the resistance level at 3.80%); mortgages traded +5/32 (.15 bp) and the DJIA futures was -19, suggesting a lower open at 9:30. At 9:30 the DJIA opened -23, 10 yr note +5/32 at 3.82% -2 bp and mortgage prices +4/32 (.12 bp).

Although the housing starts were weaker in March than forecast, the big revision in Feb starts evened the two months out. With all increases in the South and declines in every other region the report is seen as a slight negative from the markets' perspective. The bond market took it as a weak housing report and equity markets apparently see it the same way with the key indexes opening weaker this morning.

Another support for the interest rate markets this morning is the continuing issue in Europe over the debt crisis in Greece. A problem that seems to grow more legs everyday and won't go away. The current outlook (at least today) is being treated as a support for the bond market. European Union ministers met to discuss Greece's budget deficit; saying Greece doesn't have an immediate plan to trigger a rescue package even as the country's bond yields rose to the highest since before the bailout plan was announced. With no real progress noticeable, the bond market this morning is getting a bid with still nothing of substance other than a lot of talk, a safe haven move.

Interest rate markets are also being supported this morning on comments last night from SF Fed Pres Yellen. Yields on two-year notes, most sensitive to central bank monetary policy, fell below 1.0% for the first time in over a month as Janet Yellen said yesterday inflation is "subdued." Earlier this week the CPI data confirmed no inflation in the pipeline and last week's 10 yr inflation-indexed note auction implied little worries over any increases. Hardly anyone out there is expecting inflationary pressures, including Bernanke. No inflation concerns will keep interest rates from increasing, however that alone will not trigger a big decline in interest rates. Treasury will have to continue borrowing $192B a month in 2 yr through 30 yr notes and bonds, keeping interest rates from falling much.  

The final data point this week; at 9:55 the U. of Michigan consumer sentiment index, expected at 75.0 frm 73.6 at the end of March. The index was 69.5 much lower than forecasts; the current conditions index expected at 84.0 fell to 80.7 frm 82.4 at the end of March, the expectations index at 62.3 from 67.9 at the end of March was forecast at 68.7, and the 12 month out expectations at 71.0 frm 78.0 at the end of March. The report was very weak compared to estimates, but the volatility in the data twice a month has been discounted somewhat in the markets. That said, it does introduce more concerns over the economic future.

The bellwether 10 yr this morning is once again testing its resistance level at 3.80%; so far unable to break through. If equity markets get tagged today the potential to break the resistance will increase. Stocks are weaker so far but not seeing strong selling. Given the supportive data and news this morning the 10 can't break resistance yet.