The 10 yr note is continuing to increase; at 9:00 this morning at 2.19% +1 bp while MBS prices at9:00 unchanged. Today there are no scheduled economic releases but St. Louis Fed President James Bullard will be speaking on global growth as he summers in Canada; today Montreal, last week in Toronto. In early trade prior to the 9:30 open the key indexes were slightly better with the DJIA expected to open +20; at 9:30 +47, NASDAQ +5, S&P +4; 10 yr note yield at 2.21% +3 bp and 30 yr MBSs -15 bp frm Friday’s close. The recent intraday high for the 10 as 2.23%.
A measure of Treasuries volatility climbed to the highest in almost a year last week as investors weighed whether the Fed will slow its bond-buying program as the economy improves. Volatility as measured by the Bank of America Merrill Lynch MOVE index rose to 84.8 on June 6, the highest since June 2012. The gauge has averaged 62.4 over the past year. The markets are completely consumed with what and when the Fed will begin to taper. There are reasonable arguments for about any view or opinion; it isn’t whether the Fed will begin to reduce its market support, it is all about when. One point of view that was talked about Friday was about previous comments frm various Fed officials that before any tapering the Fed may want to see 200K increases in jobs for at least four months before any actual action frm the Fed. Others see the Fed’s easing now as unproductive based on the still weak employment data and anemic economic growth as a waste of money and a disruption of normal market forces; the Fed and other central banks interfering with allowing markets to adjust to the reality frm the manipulated market effects caused by the Fed.
The discussion over when the Fed will actually do something will continue all through the week. Next week (6/19) the FOMC meeting with its policy statement, it is wishful thinking that the statement will be definitive. One thing the Fed is facing in the QE that exists today, buying $40B a month of MBSs and $45B of treasuries, there may not be enough securities available to continue at the current pace for much longer. Disrupting the normal supply/demand would be another level of uncertainty that could roil markets.
More not good data frm Europe today; Italian GDP fell 0.6% and France’s industrial confidence stalled in May. The euro-area economy contracted 0.2 percent in the first three months of the year, extending its recession into a sixth quarter, and is forecast to stagnate in the second quarter before returning to growth. China’s economy also slipping, the yr/yr industrial production below forecasts and export gains caused by weak European and US markets are at the lowest levels in 10 months.
US, Europe and China’s economies are slipping but at present it isn’t of much interest for stock markets as the key indexes keep climbing. The only thing so far that the Fed’s easing has accomplished is to force investments into equity markets. We would not want to step in the debate on how much longer and how much higher the key indexes will go before economic reality takes over from the low interest rates the Fed has engineered; like trying to swim up Niagara Falls these days. The recent increase in mortgage interest rates based on the weekly MBA mortgage applications data have shown a sizeable decline in apps, especially re-finances. The housing sector has been touted by almost everyone as one of the pillars of the economic growth (which isn’t much); if sales were to decline another pillar will have crumbled. That said, there is no immediate reason to expect a big decline in sales---so far.
So far this morning the 10 yr note after hitting at 2.22% has fallen back to 2.21% at 10:00; the stock market pend higher but has slid back at 10:00. Continued intraday volatility can be expected through the day in both stocks and the bond market. This morning the 10 is at its highest yield this month and 30 yr MBS prices are testing key support levels again; so far holding but very vulnerable now. The 10 is likely to move to 2.25% before any significant rebound. Any rebound in the bond and mortgage markets isn’t likely to be much with most now believing the Fed’s easing is coming to an end. Holding on for lower rates so far has not been a good decision for those taking that risk.