Not a good day in the bond market; the 10 yr clearly broke its near term support and is now poised to move to 3.00% area. Mortgage rates also moved higher today, following the 10 yr note. Supply is the culprit; as we have talked many times, the long end of the curve is not likely to move much lower than what we saw on 3/18 when the Fed announced it would buy an additional $725B of MBSs and $300B of longer dated treasuries; the 10 fell briefly to 2.50%. It took two weeks to move back to where it traded prior to the Fed's announcement. With the government throwing everything but the sink into trying to revive the economy, Treasury borrowings will keep interest rates from falling. Traders are now turning to supply issues as the equity market is improving. Although we do not believe the economy will rebound much, and the present stock market improvement is a rally in a bear market likely to see new lows by the end of the year, the momentary reality is that investors and talking heads are calling the stock market rally the end of the declines.
Next week we expect Treasury to sell $59B in notes, last week it sold $93B. $6 billion in 10- year inflation-indexed notes on April 7; $35B of 3 yr notes on the 8th, and $18B of 10 yr notes on the 9th. The Congressional Budget Office is now saying a deficit of $1.38 trillion this fiscal year; the White House estimate, $1.17 trillion (low balling). We still look for the deficit to come in higher, at $1.50 trillion. Next year likely closer to $2.0 trillion.
Delinquency rates on the least risky home loans, which account for two-thirds of all mortgages, more than doubled last year, showing credit quality deterioration is spreading through the housing market, U.S. regulators said. Seriously delinquent prime loans climbed to 2.4% of total loans on Dec. 31, from 1.11% in the first quarter, the Office of the Comptroller of the Currency and Office of Thrift Supervision said today in a report. Mortgages in delinquency rose 30% in the fourth quarter, accounting for 4.6% of all home loans, the report showed. "We're in uncharted territory, we've never seen the number this high before," John Dugan, U.S. Comptroller of the Currency, said in a Bloomberg Television interview today.
Wells Fargo plans to expand its presence in warehouse lending using a platform it acquired when it bought Wachovia Corp. at year-end, according to industry officials familiar with the matter. Two sources at Wells confirmed the move but at press time a spokesman could not be reached for official comment. It's believed that at year-end Wachovia had commitments of about $1B. Very good news for non-depositories that need lines to fund mortgages.
On the week: the 10 yr note increased 15 BP to 2.91% at 4:00 -36/32; 5 yr note +8 BP at 1.88%; 2 yr +3 BP at 0.96%. Mortgage prices this week; 30 yrs -16/32 (most of it today); 15 yrs -3/32; FHA 30s -15/32. The spread between mortgage rates and the 10 yr note continue to narrow. Mortgages holding well against treasuries. Crude oil -$0.08; gold -$27.50.
Not yet much to worry about; as long as the 10 yr note doesn't trade over 3.04%. Still stuck in a 50 basis point range on the note but now has come almost all the way back up from the strong one day rally on 3/18 when the FOMC announced the increased mortgage buying and Fed to buy treasuries. Mortgage rates are increasing but continue to look technically stronger than the treasury markets. Not sure that will continue once the stock market enthusiasm wanes in the next week or two. Equities are in a bear market rally, not a turn in the tidal wave of negative economic outlook. The feel-gooders on CNBC are all lathered about the equity markets; misleading those that believe their euphoria.