Stock indexes Unchanged

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Very early this morning (7:00 am) the stock indexes were unchanged as was the interest rate market. By 9:00 the key indexes were improving and more selling was occurring in the bond and mortgage markets. Yesterday the 10 yr note closed at its highest rate in this current climb higher in rates. The 10 at 1.98% at 9:00 this morning is at another new high; MBS prices also under pressure again. The increase in rates continues as investors are jettisoning low long term fixed income investments on belief the end has already occurred for the US bond and mortgage markets. Once again today there are no scheduled economic reports. Most all focus now is on tomorrow’s testimony from Bernanke to the Joint Economic committee about the economy and the outlook. Regardless of his prepared opening remarks the focus is likely to center on his thoughts about the Fed’s bond and mortgage buying programs. Up until now the Fed has consistently talked about the slowly improving economy, although the policy statement issued after the FOMC meeting on 5/1 stated the Fed sees downside risks to the economic outlook. He will chide Congress and the Administration again that what is needed now is fiscal help, monetary help has about run its course and hasn’t achieved the desired effect; unemployment still high and there is no inflation (actually deflation is currently more of a concern). On that point, it isn’t good for the economic recovery to have the inflation rate as low as it is now (1.7% yr/yr). The economy is moribund with little pricing pressure to motivate consumer spending. The bond market is headed for its first monthly loss since January before St. Louis Fed President James Bullard and New York Fed President William C. Dudley speak today. Fed Bank of Chicago President Charles Evans said yesterday the economy has improved “quite a lot” and he would be amenable to the central bank slowing its asset purchases if he had confidence job growth would be maintained. The Fed publishes minutes tomorrow of its April 30 to May 1 policy meeting. Bullard said last month that unless inflation improved he would favor more QE. If one just followed the various comments from Federal Reserve officials, confusion would be the end result. The only voice that matters is Bernanke’s, but the noise from the other Fed officials continues to roil markets. At 9:30 the DJIA opened +24, NASDAQ +1, S&P +1. The 10 yr at 9:30 1.97% unchanged, 30 yr MBSs -9 bp, FHAs -20 bps. Last Wednesday the bellwether 10 yr note hit an intraday high yield of 1.98% before ending the day at 1.94%. This morning the 10 is re-testing that level, if the note can hold here we may see some short-covering in the next few days improving prices a little. If the 10 closes above 1.97% it will add even more negative vibes in the interest rate world. All technicals are increasingly more bearish, a new high yield close will likely push the outlook for the 10 to 2.06%, the high rate going back to mid-March. Is there a potential for a rebound in MBS prices? Possibly, but it won’t likely be enough to change the overall bearish outlook. Do not fight this bearish trend.