Treasuries and mortgages tried early to hold slight price gains but by 9:00 the 10 yr was a little lower in price and mortgages -3/32 (.09 bp) frm yesterday's close. Stock indexes early were a little better with crude oil and gold higher. Crude being pushed higher this morning on a huge fire in Canada's oil fields where most have been evacuated. No economic releases today except the weekly MBA mortgage applications at 7:00 this morning.

Technically, yesterday the 10 yr note broke its two week resistance at 3.14% to close at 3.11%; so far this morning no follow-through. After the move yesterday we are hearing a lot of talk that the 10 could fall to 3.00%; from a technical perspective it is possible. Fundamentally, the present low level of US interest rates is increasingly difficult to square. Budget deficits continue to increase, China cutting back on Treasury holdings (not much, but it is worth watching), the economic outlook has been ratcheted lower and business borrowing and business sentiment among small businesses (500 and under employees) is declining according to the NFIB recent monthly data. A mixed picture, however the present low rates are hard to justify; pick your view, weaker economic outlook will keep rates from increasing, or that Congress won't end up with spending cuts that are real and deep that would push interest rates higher.

One propellant for the recent decline in rates is built on the view that the softer economic outlook will keep the Fed from increasing interest rates until at least the 1st Q of 2012. The Fed is unlikely to increase rates with little inflationary fears now, but does that in itself justify present low interest rates? The recent decline is mostly a safety move; with equity markets not advancing, commodity price increases are over for the moment, and borrowing demand very weak. Every technical indicator we use in our near term forecasting is bullish, from a trading perspective we are bullish, from a fundamental longer outlook we are not so optimistic. We expect the end is closing in on these low levels, that said we are not expecting a rapid increase in rates----a slow grind higher. For now take advantage of the gifts mortgage rates are providing.

Mortgage applications increased 7.8% from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending May 13, 2011.  The Refinance Index increased 13.2% from the previous week and is at its highest level since the week ending December 10, 2010.  The seasonally adjusted Purchase Index decreased 3.2% from one week earlier and was 1.7% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 3.6%.  The four week moving average is down 2.9% for the seasonally adjusted Purchase Index, while this average is up 7.2% for the Refinance Index. The refinance share of mortgage activity increased to 66.7% of total applications from 63.1% the previous week. This is the largest refinance share observed since late January. The adjustable-rate mortgage (ARM) share of activity decreased to 6.3% from 6.5% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.60% from 4.67%, with points decreasing to 0.94 from 1.10 (including the origination fee) for 80% loans.  This is the lowest 30-year rate recorded in the survey since the end of November 2010. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.75% from 3.81%, with points increasing to 1.22 from 1.05 (including the origination fee) for 80% loans.  This is the lowest 15-year rate recorded in the survey since early November 2010. 

Later today (2:00) the minutes from the 4/27 FOMC meeting will be released. Bernanke held a press conference after that meeting covering much of what the FOMC discussed so the minutes this afternoon will not likely present anything surprising.

The stock market trading close to unchanged so far; if the key indexes fall the interest rate markets will continue to improve. Crude oil and gold higher this morning, crude on the fires in Canada.



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