This morning the stock market is opening weaker after the rally yesterday; the interest rate market early a little better but not much. At 9:00 the DJIA was down 75 points frm yesterday’s close, there was no change in the bond and mortgage markets even with lower stock markets here and in Europe. At 9:30 the DJIA opened -81, NASDAQ -20, S%P -10; the 10 yr at 2.16% -1 bp and 30 yr MBSs at 9:30 +5 bps.
There are no economic reports to focus on today but tomorrow and Friday we have a couple of key reports. Treasuries were little changed today, erasing a decline that had pushed the yield to 2.23% briefly yesterday, the highest in 13 months. Bonds worldwide are headed for their biggest monthly loss in nine years. When the end came it hit like a hammer, we warned a month ago the low in interest rates had occurred yet too many still held out for a rally that didn’t occur and now mortgage rates are over 4.00% and still increasing. When any market reaches extreme levels it usually ends badly for those that don’t make the adjustment quickly. In the case if interest rates, at 1.60% on the 10 yr note and mortgage rates at 3.25%, how much lower could they go? Yesterday’s selling was the biggest increase for the 10 yr note since Oct 2011 and has yet to attract any significant buying interest.
The Fed, expected now to taper its QE buying has pushed rates up and likely will continue to do so, although the volatility in the rate markets will increase with occasional; buying but the trend now is definitely up for rates. Presently the bond and mortgage markets are reaching momentary oversold momentum oscillators but we do not expect a substantial improvement even when a retracement occurs. At the moment we are unsure of how high the 10 yr and MBSs will go before the markets attract some interest. When will the Fed actually announce a reduction in its easing? In some sense it doesn’t matter, as noted recently markets don’t wait for the reality, markets always move in anticipation.
Yesterday, and this is important, Treasury sold $35B of 2 yr notes; normally 2 yr notes see good demand. Yesterday the demand for the note auction was miserable with very weak demand and suggests more bearishness for the bond and mortgage markets. Today Treasury will auction $35B of 5 yr notes, normally we expect less demand as the auctions move higher on the curve. Another weak auction at 1:00 this afternoon isn’t going to go down well in the rate markets. Tomorrow its $29B of 7 yr notes.
Mortgage applications decreased 8.8% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 24, 2013. The Refinance Index decreased 12%, the largest single week drop in refinance applications this year, from the previous week to the lowest level since December 2012. The seasonally adjusted Purchase Index increased 3.0% from one week earlier. The refinance share of mortgage activity decreased to 71% of total applications from 74% the previous week to the lowest level since April 2012. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.90%, the highest rate since May 2012, from 3.78%, with points unchanged at 0.39 for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) increased to 4.07%, the highest rate since August 2012, from 3.93%, with points decreasing to 0.27 from 0.36 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 3.62%, the highest rate since August 2012, from 3.53%, with points increasing to 0.27 from 0.13 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.10%, the highest rate since August 2012, from 2.96%, with points decreasing to 0.30 from 0.32 (including the origination fee) for 80% loans.
I hesitate to say this because it may motivate too much momentary optimism; the bond and mortgage markets are oversold and should see a little improvement as long as US and global stocks decline. It isn’t a sure thing and we are unable to predict with any accuracy when and frm what levels we will get a bounce. The present situation, regardless of when or if a rebound will occur, the bond and mortgage markets are exceptionally bearish; investors jettisoning low yield fixed income investments, mortgage markets going into the present spike were unhedged and didn’t believe it necessary to hedge the risk adding to the selling.