Treasury rates continue to increase this morning, MBS prices slightly weaker as a result. Yesterday the 10 increased 3 bp to 1.77% while by the end of the day mortgage prices were unchanged. At 9:00 this morning 30 yr mortgage prices were down 10 bp and the 10 at 1.78% +1 bp. As yesterday, there are no scheduled data this morning, at 3:00 this afternoon March consumer credit data will be released. At 1:00 Treasury will auction $32B of 3 yr notes.
Markets still focused on the April employment report last Friday. The stronger report has, at least for the moment, increased concern that the Fed may begin taking the QE away sooner than what was thought prior to the report. Before the employment report the general consensus had been that the Fed would continue the QE through the rest of this year. That view was mostly based on the weaker economic reports on March and April data; most of the key data over the past month has been disappointing. Now after April employment report the debate within markets is leaning more toward an earlier withdrawal. It is a moving target however, when we get more key economic data next week the outlook may be more clarified. That said, we are concerned about the magnitude of the increase in rates last Friday and no bounce yesterday or so far this morning.
The DJIA opened +22, NASDAQ +7, S&P +3; 10 yr note at 9:30 1.78% +1 bp, 30 yr MBSs holding n well -6 bp after being unchanged yesterday.
Not much news of substance this morning. German stock market it a new high this morning following the US key indexes; its factory orders in March were better than thought, orders up for the second month in a row. Good news for the US markets as well as Europe’s markets. Recent data from Europe’s strongest economy have been soft, similar to what we have here in the US. Orders for German exports rose 2.7% in March, with those from the euro area surging 4.2%, today’s report showed.
Recent Treasury auctions have not met with strong bidding; this afternoon $32B of 3 yr notes will be sold. Tomorrow its $24B of 10 yr notes, a more significant test of demand and directly impacting long term rates including mortgage rates. The 10 is continuing to weaken technically, now trading above its 200 day average for the second day. Also now above its 40 day average on the yield and the relative index is now in bearish territory. I doesn’t look good at the moment; the unusually strong selling last Friday suggests traders and investors holding 10 yr notes were not very comfortable with the low yield prior to the employment data. Since the employment report at 8:30 last Friday morning the 10 yr note rate has increased 15 bps. The present 1.78% was last seen on April 4th, it took a month for the yield to fall to the 1.63% low, it took a matter of hours to erase that gain.
The treasury market has had a big decline in rates recently, from 2.06% to 1.63% before the employment report. In the meantime the MBS market didn’t experience anything close to that kind of decline in rates. Now the treasury market is under strong pressure while the MBS market in comparison is holding well. Technicals on the FNMA 30 yr coupon are holding the key averages while the 10 is bleeding badly. Mortgages didn’t see the decline in rates while treasury rates were falling, now MBSs are equally not seeing the increase in rates.