Treasuries opened a little weaker this morning, MBS prices also slightly weaker at 9:00 ahead of the March ISM manufacturing index at 10:00. Last week the 10 yr yield fell 8 bp in rate as investors continue to hold some treasuries as insurance against the banking collapses in Cyprus. So far today, and over the weekend, there hasn’t been any additional news from the little island country. Over the previous two weeks the 10 yr yield fell frm 2.05% to its low last Wednesday at 1.84%, MBS prices improved as well but not as dramatic as treasuries, the safest place to park money in an uncertain situation such as Cyprus. What Cyprus clearly shows is that the banking crisis in the EU is not over; after six months of little news, the region is back on watch. Over the weekend Russia said it won’t bail out people or companies that stand to lose money held at Cyprus’s two largest banks, First Deputy Prime Minister Igor Shuvalov said. Germany alleged that Cyprus was used to launder illegal Russian money. Funds held by Russians on the island aren’t all illegal, Shuvalov said.
The only news over the weekend is North Korea’s saber rattling against South Korea and the US. On Saturday the North Koreans said the country was entering a “state of war” and threatening to strike US bases. The North saying it will not quit its nuke development. Most observers believe the increased tough talk is an effort to whip up sentiment in the country for changes in leadership as the new premier cements his hold. So far it is all words and markets overall are not taking it too seriously, at least for now.
At 9:30 the DJIA opened -17, NASDAQ +1, S&P -1. 10 yr at 1.87% +1 bp and 30 yr MBSs -2 bps. The bond and mortgage markets trading better than earlier this morning.
Two reports at 10:00; the March ISM manufacturing index expected at 54.0, as reported it was at 51.3 frm 54.2 in Feb. Not a good headline but the employment component did increase to 54.2 frm 51.4 in Feb. An index read over 50 indicates expansion. Also at 10:00 Feb construction spending; it was better than expected at +1.2% against forecasts of +1.1%---not much better though. After the data the 10 yr note yield that was at 1.88% early this morning, was unchanged from last Thursday’s close at 1.85%.
This week is employment week with March data on Friday. In the meantime there are a number of reports that can move markets. The move to safe US treasuries is likely to keep interest rates frm increasing much with the EU still roiling and now North Korea acting up. This morning China’s Purchasing Mgrs.’ index was better than thought; at 50.9, up frm 50.1 in Feb. A separate gauge from HSBC Holdings Plc and Markit Economics rose to 51.6 in March from 50.4.
Technically the only thing we are concerned about now is the momentary overbought momentum oscillators. The wider view is continuing to look friendly, the 10 yr holding below its 20 and 40 day averages on the rate and 30 yr FNMA MBSs above its 20 and 40 day price averages. Neither the 10 or MBSs however are very strong as most economists and traders are holding that interest rates will increase through the year. If there is a consensus now, the outlook is that 10 yr note will increase to 2.25% by the end of the year. The support keeping interest rates from increasing much is the Fed; the Fed is likely to continue buying $85B of treasuries and MBSs through the end of the year.