Last week the bond market didn’t get much news; Congress was out and little economic data to think about. This week Congress is back and the debt ceiling debates start in earnest. At 11:30 this morning the President is scheduled to hold a press conference, likely talking about immigration as well as debt ceiling comments. The White House has already thrown down the gauntlet, saying “there are only two options deal with the debt limit: Congress can pay its bills or it can fail to act and put the nation in default”. Treasury ran out of money at the end of last year and is now operating on emergency status, nothing new about that, it happens every time the debt ceiling is reached. The prospect of delaying SS payments, payments to government employees and contractors owed money for work completed. Another option to funding would be to sell MBS securities.
This week there are a number of economic reports; retail sales, housing starts and permits, industrial production, the Philly Fed index among others. The data will be tempered by comments that will begin to emerge from Congress and the Administration on the debt talks.
In the last two months there has been an increasing trend by investors to move out of bonds and into the equity markets. The ultra-low interest rates in the absence of safety considerations are losing luster while stocks continue to gain. The EU debt crisis has settled removing one of the major attractions of safe US treasuries. The increasing tensions in Washington should keep interest rates from increasing in any substantial way unless a miracle of cooperation unfolds. Rate markets will likely trend higher but should not increase to the extent that it will damage the recovering housing sector.
The 10 yr note opened better this morning, as did the mortgage markets. At 8:30 the 10 yr note rate at 1.85% with MBS prices +15 bp. At 9:30 the DJIA opened flat; the DJIA +7, NASDAQ -1, S&P unch. The 10 yr 1.84% with mortgage prices +15 bp. There are no data points today. The President’s press conference at 11:30 should keep things stabile until then.
There is a minor support for the 10 yr note at 1.85% with key longer support at 1.78%. If the 10 does break its longer support it will likely be a run to safety again caused by the inability of our politicians to effectively negotiate the debt ceiling and spending cuts necessary. Obama repeatedly has said the country doesn’t have a spending problem, while Republicans counter with there is no revenue problem. Not a very auspicious way to start discussions.
As noted; we hold interest rates will likely not increase dramatically but also won’t likely fall much from current levels. The 20+ year bond market rally is over. In 1982 the 30 yr bond rate as 18%; 30 yr mortgage went for 17%. Markets have covered the entire gambit; those that hold we will have rates back to 1.40% for the 10 yr any mortgage rates under 2.00% are likely to be disappointed and may miss out by waiting while rates edge higher.
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