Steve McCoole

Update: The concerns over Greece and other European nations just won't go away . . Standard & Poors downgraded Greece's debt rating to junk and that is sinking stocks and causing a major rally in bonds. Not good for the world economic picture but very good for interest rates . . FLOAT

Here is today's Market Snapshot from RateAlert.com:

Treasuries and mortgages opened strong this morning as the debt concerns spread in Europe. It is Greece leading the problem but as each day passes with nothing accomplished the contagion is spreading to include Portugal, Spain and likely will include Ireland in the coming weeks. The growing debt problems in Europe are continuing to fuel safe haven moves to US treasuries and mortgages are taking the ride with them. Also adding support this morning, the US stock market is under pressure in the pre-market futures trading; at 8:30 the DJIA -11 with the other key indexes also weaker. The 10 yr at 8:30 +11/32 at 3.76% -5 BP, mortgage prices at 8:30 +8/32 (.25 bp). At 9:30 the DJIA opened -35, 10 yr +14/32 3.75% -6 BP, mortgage prices 8/21 (.25 bp)

German Chancellor Angela Merkel said today she is unwilling to release any financial help for Greece until the country comes up with a viable budget plan; so far that hasn't happened. Greece has 8.5 billion euros ($11.4B) of bonds coming due next month (May 19th) after the state election and the extra yield that investors demand to hold its 10-year bonds over German bunds jumped 93 basis points to 652 basis points yesterday. Yields stayed near the highest since at least 1998 today amid mounting concern Greece will ask investors to accept delayed or reduced payments on its debt. Greece came up with a one yr budget plan but that according to Merkel isn't enough, she wants at least a five yr plan.

The sovereign debt issues are unlikely to wane, we expect them to increase in concern within the global debt markets. As we have been noting in previous commentaries, Spain's economy is substantially larger than Greece and it too hangs on the edge of potential debt defaults as the European economies are lagging the rest of the world in recovery from the recession. Portugal and Ireland are in about as difficult situation as the contagion of rampant spending is pushing many secondary economies to the edge. As long as the crisis continues without resolution the US bond market will benefit and pull mortgage rates lower along with treasuries. Now we are watching countries in South America for the same problems, Argentina has appeared on the radar. All that said; in the end the EU and IMF will come up with money to keep Greece from defaulting, a default by Greece or any EU country would send the euro much lower, it has already declined 7.0% against the dollar this year and today is lower again.

At 9:00 the Feb Case/Shiller home price index of the 20 largest metro areas was expected to show the first improvement in 3+ yrs, up 1.1%. C/S reported prices in Feb declined 0.1% in the 20 largest metro areas, on a yr/yr basis however prices for the 10 and 20 metro areas increased 1.4%. For the 20 cities the yr/yr was expected to increase 1.2% but were half that at +0.6%. Prices continue to decline and C/S says it is too early to predict or expect home prices to start increasing. The reaction to the report sent treasury prices higher and mortgage prices a little better than prior to the data.

At 10:00 April consumer confidence, expected to have improved to 53.7 frm 52.5 in March, was better at 57.9. The expectations index, a measure of one yr out increased to 77.4 frm 70.4 in March. The initial reaction brought the stock indexes back to unchanged and somewhat softened the rate markets.

A little theater this morning in Washington; Lloyd Blankfein and The Fabulous Fab of Goldman/Sachs are testifying in Congress on G/S and how it conducted itself during the sub prime meltdown. Until now Blankfein has been rather outspoken and defensive on any of the allegations, will he temper his attitude in testimony and Q&A in what will likely be a contentious session? The crux of the issue is whether G/S traded against its clients by shorting the sub prime markets with credit default swaps. They did, and they profited from it, what remains is whether they were at the same time selling the junk sub prime CDOs to investors. The Senate's Permanent Subcommittee on Investigations released documents that showed the company "put its own interest and profit ahead of the interests of its clients."

This afternoon Treasury will sell $44B of 2 yr notes to begin three days of auctions totaling $118B. The 2 usually goes off well with strong bidding, today the safe haven concerns growing on the European potential debt defaults (lead by Greece) should add to the demand.

Today US rate markets are being driven mostly on safe haven moves with the debt problems in Europe; Greece, Spain, Portugal and Italy saw their 10 yr note yields jump as much as 50 basis points overnight on concerns the contagion is spreading for potential sovereign defaults. It is difficult to handicap in terms of the lasting impact on US rates moving lower, at the moment a plan is worked out to save Greece (and we believe it will happen) the need for safety will lessen and take away the present strong support for US treasuries.

Update: Mortgage Bonds are still negative but off the lows of the day so at this point we can very carefully FLOAT.

Here is today's Market Snapshot from Rate Alert.com:

Interest rates jumped overnight and opened this morning higher with prices of mortgages down along with treasuries. At 8:30 March durable goods orders were much lower than expected on the overall at -1.3% against +0.4%, when auto sales are withdrawn orders jumped 2.8% against forecasts of an increase of 0.6%. Total orders unexpectedly dropped, depressed by a 67% plunge in demand for commercial aircraft that is often volatile. Feb durable goods orders were revised from +0.9% to +1.1%. At 9:00 this morning the 10 yr note -9/32 3.82% +4 bp, mortgage prices -8/32 (.25 bp) and the DJIA futures +13. At 9:30 the DJIA opened -17, the 10 yr got a little support on the open, -7/32 at 3.80% and mortgage prices -5/32 (.15 bp).

At 10:00 March new home sales were expected to be up 6.7% to 330K units (annualized); HOLY COW! sales jumped 26.9% to 411K units and that is after upward revisions to Feb and Jan (Feb from 308K to 324K, Jan from 315K to 338K). The NE +35.7%, Midwest +4.3%, South +43.5% and the west +5.7%. The median sales price $214K with just a 6.7 month supply down from 8.6 months in Feb. The way off the charts improvement hasn't done much to the bond market so far but did turn the equity markets up from trading lower prior to the release.

Greece continues to have impact on US bond rates and the dollar; the Greek government today sent a letter formally requesting the release of an EU aid package to help the government stave off a default. Stocks in Europe rose and the euro snapped declines that drove it to a one-year low against the dollar as Greece asked the European Union for the aid package. Greek bonds and stocks plunged yesterday, dragging down European markets, as Moody's Investors Service cut its rating on Greek debt one step to A3 and the EU revised up the country's budget deficit. Credit-default swaps on Greek government bonds fell 54 basis points to 591 today, after rising to a record 650 basis points yesterday. The 10 yr treasury yield climbed from near its lowest in a month as Greece called for the activation of the financial lifeline of as much as 45 billion euros ($60 billion) to help it avoid a default.

Talk from a number of Fed officials this morning that the Fed should begin selling assets it accumulated in the bailout binge; six members of the FOMC want the Fed to sell some or all of the $1.25T of MBSs it bought over the past year. Bernanke however is not likely to get on board that train now, as long as there is still concern that this recovery is flawed with the housing markets still declining and unemployment high. The Fed is very unlikely to begin selling assets until it is convinced by doing so it won't disrupt markets; the idea the Fed would dump MBSs on the market anytime soon is far fetched. The MBS markets are still on life support, but the venelator has been removed and improvement is slowly gaining momentum; yesterday the first private label MBS was issued since the crash in 2008; it was for jumbos, 225 loans with an average loan of $933K and average credit score of 733---a nice start.

Treasuries are headed for a weekly loss on concern rising debt supply will deter buyers at the next week's auctions, much better than expected Mar durable goods orders, and continual evidence that the economic recovery is gaining momentum. So far 85% of all S&P stocks that have reported earnings have been good and some much better than expected. Germany's economic rebound is also increasing. As long as the world is convinced the global economy is recovering the path for interest rates will continue to be higher. Sovereign debt will push rates higher as governments have to borrow and in turn compete with the private sector. That said, we continue our outlook that rates while increasing won't spike quickly---a slow path upward.

Not likely the bond and mortgage markets can turn around today with the very strong economic releases and next week's $118B of Treasury borrowing. The magnitude of price declines in mortgages and treasuries through the rest of the session will depend on how firm the equity markets trade off the data points today.

Update:The MBS Market has turned negative in the last half hour. Bonds once again were turned away by the thick ceiling of resistance formed by the 50 day and 200 day moving averages. Since there is nothing on the horizon that could be forseen to boost them over that resistance and with an upcoming announcement of next weeks Treasury auctions my advice is to LOCK as it appears we may be hitting a high point in the market.

Here is today's Market Snapshot from RateAlert.com:

Update: The Mortgage Bond Market is up a bit today, testing the resistance of the 25 day moving average. This resistance has turned the bond back everyday so far this week and with no economic reports due to be released today it is likely the same will happen. Since we are positive, we can very carefully FLOAT watching for thing to possibly go south if the bond fails once again to break resistance.

Here is today's Market Snapshot from RateAlert.com:

Another quiet start for the markets this morning with no economic data and no news. Earnings continue to be reported and most are beating the Street estimates, nevertheless futures trading on the key indexes is weaker, pointing to a weaker open in equities at 9:30. At 9:00 the DJIA -15, the 10 yr note +5/32 and mortgages +1/32 (.03 bp) frm yesterday's close. At 9:30 the DJIA opened +9, 10 yr at 9:30 +5/32 at 3.78% -2 bp and mortgage prices +5/32 (.15 bp) frm yesterday's close.

The MBA today released its Weekly Mortgage Applications Survey for the week ending April 16, 2010. The Market Composite Index increased 13.6% on a seasonally adjusted basis from one week earlier. The Refinance Index increased 15.8% from the previous week and the seasonally adjusted Purchase Index increased 10.1% from one week earlier. The unadjusted Purchase Index increased 11.0% compared with the previous week and was 5.2% lower than the same week one year ago.
The four week moving average for the seasonally adjusted Market Index is down 3.1%. The four week moving average is up 2.0% for the seasonally adjusted Purchase Index, while this average is down 5.9% for the Refinance Index. The refinance share of mortgage activity increased to 60.0% of total applications from 58.9% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 6.0% from 6.3% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.04% from 5.17%, with points increasing to 0.98 from 0.91 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.34% from 4.45%, with points increasing to 0.98 from 0.80 (including the origination fee) for 80% loans. The average contract interest rate for one-year ARMs decreased to 6.95% from 7.02%, with points increasing to 0.28 from 0.27 (including the origination fee) for 80% loans. The survey covers over 50% of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.

The fall-out over the G/S SEC suit is speeding financial reform in Washington. Republicans and Democrats appear to be closing the gap between them; Dems are considering dropping the $50B fund to bailout any future "too big to fail" firms that hit the wall. Republicans have opposed it on the grounds it sets up a condition that banks have a free pass in case they make more stupid and illogical mistakes that almost crashed the global financial system. Republican Senator Richard Shelby of Alabama said he and the measure's Democratic author, Banking Committee Chairman Christopher Dodd of Connecticut, are close to an agreement on the legislation. "I believe that we're going to get us a bipartisan bill," Shelby told reporters yesterday in Washington. "We're probably conceptually together on 85 percent" of the bill. The first hurdle is a measure before the Senate Agriculture Committee today that seeks to regulate the $605B over- the-counter derivatives market. Among other things, it would require banks such as JPMorgan Chase & Co. and Bank of America Corp. to choose between trading swaps and their core business of holding deposits.

The bellwether 10 yr note is trying to cut below its technical resistance at 3.80%, trading at 3.78% this morning and hitting up against its key 40 day moving average at 3.77%. A break and close below the 40 day average would suggest further decline to 3.65%----although we doubt that will occur unless stock markets roll over on renewed concerns about the economic recovery----and that doesn't appear likely.

Remember all the angst over the concerns mortgage rates would spike when the Fed stopped purchasing MBSs at the end of March? As we noted in mid-March and a few more times since, the Fed's extraction would not likely have any immediate impact on mortgage interest rates. It hasn't happened, mortgage rates have remained very stable in relation to the 10 yr and 5 yr treasury notes. Mortgage rates last week were the lowest in over a month and will continue to move in tandem with the 10 yr note (as is always the case). The spread, or differential between the yield n the 10 yr and mortgages, has remained about where it has been for months. Those that insist that mortgage rates are independent of the treasury market continue to mislead.

Should be another very quiet day today with no news or data directly impacting markets.

Update - MBS Market starting to sell off in mid-day trading again today. Alert to LOCK!

Here is today's Mortgage Market Snapshop from RateAlert.com:

Treasuries and mortgages opened soft this morning but by 9:00 the 10 yr and mortgage prices climbed back to unchanged. There is no economic data to deal with today, most of the chatter remains about G/S and the SEC fraud charges filed against them. This morning comments from G/S legal counsel. "We would never intentionally mislead anyone, certainly not our clients or our counterparties," Goldman Sachs Co- General Counsel Greg Palm said today on a conference call with analysts. "We have never condoned and would never condone inappropriate behavior by any of our people. On the contrary, we would be the first to condemn it and take all appropriate action. ‘‘Our responsibilities as a financial intermediary require it and our commitment to integrity and the firm's business principles demand it,'' Palm said. Palm said Goldman Sachs had ‘‘no incentive'' for the deal to fail, and lost more than $100 million on the transaction. G/S reported Q1 earnings that surpassed analysts' estimates on record fixed- income trading revenue.

According to a story on Bloomberg this morning, the SEC vote to sue G/S was 3 to 2 and was split on party lines. Two Democrats voted to charge G/S while two Republicans voted against the suit, the tie was broken by Independent Chairperson Mary Schapiro siding with Democrats. The SEC case signals the regulator could eventually target other banks over how much they told investors about at least $40 billion of CDOs that turned toxic as mortgage defaults soared to the highest level since the 1930s. Robert Khuzami, the SEC enforcement chief, said last week that the agency will aggressively pursue deals "that share similar profiles."

Looking over every news wire this morning, I can't find much that is of immediate interest to the bond and mortgage markets. As for the G/S suit, it isn't going to have much of an impact on the direction of interest rates. The original announcement of the suit last Friday has been digested and regurgitated; the stock market caved on Friday and a rush to safety into treasuries sent yields lower. By yesterday the shock had worn off; the DJIA rallied and the bond and mortgage markets gave back half of the improvements from Friday. This morning with little news the rate markets are flat with the stock index futures aiming for a solid opening. At 9:30 the DJIA opened +35, the 10 yr at 9:30 -2/32 and mortgage prices -2/32 (.06 bp) on 30s and -3/32 (.09 bp) on 15s.

At 11:00 Bernanke and Geithner will go before Barney Frank's Committee to talk about the failure of Lehman Bros. Yesterday the prepared statement from Bernanke was released so markets have a good idea what will occur at the hearings. Likely nothing that comes from the testimony will have any direct impact on the present rate markets. Bernanke will remind Barney that the Fed was not responsible for regulating Lehman and detail the steps the Fed didn't take to save the firm. Many blame the Fed for not saving Lehman and believe if Lehman were rescued the financial crisis would have been much less of a trauma.

Should be a quiet market today; the equity markets opened better than expected at 9:30 but going into 10:00 the indexes have settled down. The bond and mortgage markets, with nothing to digest will trade quietly today.