The bond and mortgage markets opened better this morning after the strong selling the last two sessions taking rates up 20 basis points. The Greek debt issue is off the radar for the moment after its parliament voted to cut spending and qualify for assistance from the IMF and EU keeping Greece from defaulting, at least for now. Safety trades in US treasuries being closed and the very weak treasury auctions this week along with the end of QE 2 today---all combined to drive rates higher in a rapid move. Mix in that the ECB will likely increase its base interest rates next week and the tone has changed. Both the 10 yr note and FNMA 4.0 coupon hit and held their respective 200 day averages but broke all other shorter term averages, the momentum oscillators are now in bearish levels. As we continue to point, the bond and mortgage markets are going to remain volatile over the next week or so as investors work through the end of QE 2, Europe's continuing debt issues and the weakening economic outlook. We are not looking for interest rates to increase in a major way but it is unlikely rates will return to the best levels seen three or four days ago.


Germany’s biggest banks and insurers and the government agreed on a draft proposal to roll over Greek debt holdings before a meeting with Finance Minister Wolfgang Schaeuble today, people familiar with the plan said.(Bloomberg)


Weekly jobless claims at 8:30 were down just 1K to 428K, estimates were for a decline of 8K. Continuing claims declined 12K to 3.72 mil. Weekly claims have now been above 400K for 12 consecutive weeks, no improvement but equally no increases in claims.


At 9:30 the DJIA opened +47, the 10 yr note +7/32 at 3.10% -2 bp and mortgage prices +5/32 (.15 bp).


At 9:45 the June Chicago purchasing mgrs index, expected at 53.8 frm 56.6 in May, jumped to 61.1; new orders increased to 61.2 frm 53.5, employment did decline to 58.7 frm 60.8 and prices pd at 70.5 frm 78.6 on a decline in oil prices recently. The report much stronger than thought flipped the bond and mortgage markets from minor price gains to lower prices; mortgage prices at 9:3 up 5/32 (.15 bp) at 9:50 -5/32 (.15 bp), a .30 bp swing lower and breaking the 200 day averages on the 10 yr yield and prices on the FNMA coupon. VOLATILITY!


Will the Fed launch QE 3 at some point? That is the question being debated in minds of traders now with the economic outlook declining somewhat. Many believe the Fed is out of bullets to help the economy, historically low US interest rates haven't helped much, at least based on where the economy stands now; however what would have been the situation if the Fed hadn't executed QE 2, buying $600B of US treasuries? Bernanke has said it is now a fiscal matter, meaning Congress and the Administration have the ball now; that of course isn't a confidence builder in the minds of investors since Washington continues to play its political games while the country stumbles.  


Today is the end of the month and the end of the quarter, to some extent today trading in equities and bonds may be impacted on moves large investors need to make to adjust their portfolios for the end of the 2nd quarter.

Early this morning the 10 yr note made a new low yield at 2.88% frm 2.97% at the end of yesterday on increasing concerns over Europe's debt problems headlined by Greece. The European Union’s failure to contain the Greek debt crisis is sending fresh shockwaves through currencies, money markets, equities and derivatives. The cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 78% chance that Greece won’t pay its debts. Equities declined around the world, while a measure of fear in fixed-income markets jumped the most since November. Market moves suggest heightened concern that authorities won’t be able to keep Greece’s debt troubles from spreading after Moody’s Investors Service said it may downgrade BNP Paribas SA and two other big French banks because of their investments in the southern European nation.

At 8:30 weekly jobless claims and May housing starts and permits pushed yields up as the data was better than expected; weekly claims were down 16K to 414K. forecasts were that claims would be 421K, continuing claims also fell (21K). May housing starts were about what was expected, up 3.5% with single family starts up 3.7%; April starts were revised from -10.6% to -8.8%. Building permits were thought to be down 0.5% but reported up 8.7% the highest permits since Dec 2010; multi family was the main reason for permits higher, multi-family permits jumped 23%. The two data points took the wind out of the bond market and safe haven buying that had set a new low yield on the 10 yr and had mortgage prices up 8/32 (.25 bp) frm yesterday's close.

At 8:30 the Q1 current acc't deficit was -$119.27B lower than -$130B expected. The current account measures the United States' international trade balance in goods, services, and unilateral transfers on a quarterly basis. The levels of exports, imports and the current account indicate trends in foreign trade.

By 9:15 the 10 yr note yield climbed back to 2.96% frm 2.88% prior to the 8:30 data, mortgage prices at 9:15 unchanged after being up .25 bp at 8:15. The DJIA futures traded had the index unchanged at 9:15 after being down 70 points at 8:15. Volatility remains high as we noted yesterday.

Keeping the running story going, at 9:30 the DJIA opened down 6 points, the 10 yr at 9:30 +7/32 at 2.95% -2 bp and mortgage prices very volatile this morning up 3/32 (.09 bp). Trade between 9:30 and 10:00 wasn't significant with the 10:00 Philadelphia Fed business index due. Always significant to traders, this time it is even more so after yesterday's NY Fed manufacturing report went negative indicating contraction.

At 10:00 continued volatility with the Philly Fed business index; the index went NEGATIVE indicating contraction. The index was expected at +8 it fell to -7.7 the second report in the last 24 hours that the economy is contracting. New orders in the June report were negative at -7.6 indicating orders declined, the employment component fell to 4.1 frm 22.1 in May while prices pd fell to 26.8 frm 48.3. May Philly Fed was 3.9. The initial reaction put a small bid back into bonds and mortgages but not as much as we might have thought. The DJIA at 10:06 +26, the 10 yr +9/32 at 2.94% and mortgage prices +3/32 (.09 bp).

May non-farm jobs were up just 54K, non-farm private jobs +83K; the unemployment rate increased to 9.1% frm 9.0% in April. April and March non-farm jobs were revised down by an additional 39K. Manufacturing down 5K, government jobs -29K mostly at the state level. The U-6 jobless rate 15.8%; those underemployed and those that have stopped looking. Jobless duration 27 weeks or more 6.2 mil up frm 5.839 mil in April. Going into the report the estimates were +150K non-farm jobs, +175K private jobs, 8.9% unemployment rate; estimates were all over the place but those were the general consensus.


The bullish view is that the slowing in the economy is temporary; weather, high gas prices and climbing food prices are pulling the economy lower. There is however a hard core group of forecasters, mostly those whose business requires investments in equities, that will continue their bullish outlook on the belief all those factors will go away soon. The word "temporary" is being tossed around loosely, yes the economic decline is temporary but we need some definition of the word in terms of specifics. The more realistic view, at least in our opinion is that consumers have a long way to go ion repairing their balance sheets and re-adjusting to the "new normal" economy that appears to be ignored by Wall Street. As long as house prices continue to fall and people increasingly lose faith in our political leaders businesses will not increase hiring, unemployment will remain high and the economy will stagnate with only minor growth.


Crude oil is falling this morning on the soft jobs report, weaker economic outlook means less oil usage. The DJIA opened at 9:30 down -110, the 10 yr note +21/32 2.96% -7 bp and mortgage prices +15/32 (.47 bp).


Will there be a QE 3 from the Fed given the weakening economy? The more important question is; will a QE 3 actually help the economy? QE 2 didn't help much as is evident by recent data, housing still in depression and unemployment increasing again. The Fed;s QE 2 pushed investors into the equity markets, but did noting to help consumers or the all-important housing markets. Low interest rates are welcome, however the level of interest rates are not the issue. 


At 10:00 the May ISM services sector data; the overall index expected at 54 frm 52.8 in April, actually increased to 54.6. New orders up to 56.8 frm 52.7, prices pd 69.6 frm 70.1 and employment 54.0 frm 51.9. The report is the best report seen in the past two weeks on the economy. it wasn't huge but anything better will keep interest rates from declining much the rest of the day. The initial reaction helped the stock indexes off their worst levels and took a few clicks off the 10 yr and mortgage prices.