Treasuries and mortgages had a nice day yesterday while the stock market declined. This morning there is no follow-through in the bond or stock markets, stock index trading prior to 9:30 were pointing to a better open, the 10 yr note yield at 9:00 up 4 bp back to 2.00% and 30 yr MBS prices down 36 bp after increasing 47 bp yesterday.
Yesterday news of a political scandal in Spain and a banking scandal in Italy sent Europe’s stock markets lower and aided in pushing the DJIA down 130 points. This morning Europe’s stock markets are recovering turning US indexes higher. Money moved away from Europe’s stocks and back to so-called safety in Italian and Spanish bonds. Although Italy and Spain are making headlines with their scandals; the ECB balance sheet is shrinking as banks in the region are re-paying 3 yr loans, suggesting the banking system in the EU has improved. In the US the 10 yr note yield declined 9 bp yesterday following Europe and finding support at the 2.00% level. For months now the EU problems that had driven interest rates down on safety concerns have ebbed, now however EU issues may be back in play; but with US interest rates increasing today there doesn’t appear to be any run to safety of treasuries as we experienced last summer when the 10 yr note yield fell to 1.40%.
At 9:30 the DJIA opened +71, NASDAQ +7, S&P +7; 10 yr note 2.01% +5 bp and 30 yr MBSs -45 bp.
At 10:00 the Jan ISM services sector index was expected at 55.0; the index as reported at 55.2 frm 55.7 in Dec. There was no reaction to the only data today as stock indexes continue to increase.
The bond and mortgage markets still holding at support levels but unable to find and traction for any retracement. The stock market is strong, but remains technically overbought; new small investor money now moving into equity markets after the huge improvements over the past month. As long as stock indexes increase there is little reason to expect much improvement in the rate markets. The 2.00% area is still acting as support for the 10 yr note, but so far not even a minor rally. The bearish trend continues this morning. Although interest rate markets are weak, we still hold that a correction is likely; when is very uncertain and frm what levels it will occur is elusive. That the rate markets continue with over-sold momentum oscillators and resist any moves to improve is evidence that low fixed income investments have lost most of their luster seen in 2012.