The bond and mortgagee markets started slightly weaker this morning after the strong selling yesterday morning. Yesterday morning prices tumbled and interest rates increased on very strong Dec durable goods orders; the 10 yr climbed to 2.00% with 30 yr MBS prices off 44 bp in the morning. The afternoon saw a rebound, the 10 yield ended at 1.96% as 2.00% held; 30 yr MBSs at the end of the day ended about unchanged recovering all the morning losses. We noted last Friday that we expected increased volatility this week with all that markets would face, looks like we are seeing it. This morning at 9:00 the 10 yr at 1.97% +1 bp with MBSs -6 bp frm yesterday’s closes. Early traded in the stock index futures at 9:00 were pointing to a slightly weaker open.
At 9:00 the Nov Case/Shiller 20 city home price index showed yr/yr price gain of 5.5% frm Nov 2011, right on what was widely thought. The increase is the biggest since August 2006. Prices frm Oct increased 0.6% in Nov. The price index is an average of prices over a 3 month period; in this case Sept and Oct data along with Nov data made up the yr/yr increase. Nineteen of the 20 cities in the index showed a year-over- year gain, led by a 22.8% jump in Phoenix and a 12.7% increase in San Francisco. Last week’s combined sales of new and previously owned properties last year rose 9.9%, the biggest annual gain since 1998. Just about every housing statistic released over the last few months have shown the housing market on a strong path of recovery.
At 9:30 the DJIA opened +6, NASDAQ -8, S&P -1; 10 yr note unchanged at 1.97% and the MBS market unchanged from yesterday’s close.
At 10:00 January consumer confidence frm the Conference Board was thought to be unchanged frm Dec at 65.1. Similar to the U. of Michigan sentiment index, the confidence index declined to 58.6 as reported. O initial reaction to the data.
This afternoon Treasury will auction $35B of 5 yr notes; yesterday’s 2 yr note auction was OK, nothing outstanding. Today’s 5 yr should also see reasonable demand but not a blowout demand with the outlook for interest rates increasingly more bearish. Tomorrow Treasury will sell $29B of 7 yr notes.
The FOMC meeting begins this morning, concluding tomorrow afternoon with the policy statement. Always very important to markets, this policy statement is even more so after the minutes frm the Dec meeting indicated there is an increasing discussion within the group about how the Fed will eventually withdraw from the $85B of treasuries and MBSs that it is presently buying each month. When the minutes were released earlier this month the bond and mortgage markets saw rate increases as the fear of the Fed ending those purchases pushed prices down. This meeting, the policy statement tomorrow should provide more clarity about what the Fed is thinking now. Unlikely Bernanke will end the purchases anytime soon but markets don’t wait to see the whites of eyes. That there were discussions last meeting has removed some of the remaining bullishness for fixed income investments, especially low yielding treasuries and mortgages.
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