Treasuries and mortgages opened weaker this morning ahead of the FOMC statement at 12:30 this afternoon. The consensus is that the Fed will extend Operation Twist at the meeting. The view of more buying at the long end while selling short maturities has grown rapidly this week so it’s likely that the Fed will bow to the markets. Fifty-eight percent of respondents in a June 18 poll said the Fed will prolong the program, which seeks to lower borrowing costs by extending the average maturity of the securities in the central bank’s portfolio. At the same time, with inflation close to their 2% goal and the Greek election reducing the risk of a euro breakup, they may decide an additional round of quantitative easing isn’t needed for now The current program ends this month. At 2:00 this afternoon Bernanke will hold his press conference, generally just more detail about the meeting but Q&A should be interesting given Europe and its impact on the global economy.
Bank of England Governor King was overruled for the first time in almost three years today as he joined a push to expand stimulus that’s gathering momentum as the danger of Europe’s debt crisis intensifies. The Monetary Policy Committee voted 5-4 to keep its bond-purchase target at 325 billion pounds ($511 billion) this month. That defeated votes by King and two other committee members for a 50 billion-pound expansion.
Now that the Greek election is over and a new government has been formed there is at the moment a sliver of optimism that the various political bodies will act to provide some relief to the region’s massive debt and banking problems. This morning interest rates in Spain and Italy are lower; the yield on the Spanish 10-year bond fell 27 basis points to 6.77%, the Italian 10 yr yield 17 basis points lower. The yield on the German 10-year bund rose eight basis points this morning and US 10 yr is 5 bp higher this morning. Less fear leads to higher US rates; a month ago the German 10 yr yield was 45 basis points lower than US 10 yr, now the spread has tightened to 5 basis points, the tightening is a result of German rates increasing rapidly.
Last week the MBA reported applications for purchases increased 13% while re-finances were up 19% frm the previous week. This week the MBA mortgage applications index fell 0.8%, the purchase index down 9.0% while the re-finance index is up 1.0%. The MBA calls a 9.0% plunge in purchase applications for home mortgages a "recalibration" following the Memorial Day holiday and it notes that activity remains within a narrow 3-year band. The report noting that the refinance composition held up due to FHA loans as related premiums on streamlined loans came fully into effect allowing borrowers to lower their rates without increasing their FHA premiums. Refinances accounted for 83% of all apps last week.
The G-20 meeting in Mexico, as usual when global leaders meet, there isn’t anything of substance; posturing and photo ops and comments that are the same as markets have waded through for the last two years.
The 10 yr note yield has now moved above its 20 day average at 1.65%, and is testing the relative strength index at the 50 level for the first time since early April when the index fell below 50. Technically the rate markets are weakening, although so far haven’t turned completely bearish. The next few days from a purely technical perspective will be important or the outlook for interest rates. With Greece having formed a new government there is a little less push to safety that has contributed to the recent decline in US interest rates.
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