Interest Rates Increase

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Not a good start to the week with interest rates continuing to increase; at 9:00 the 3.5 July FNMA coupon -111 basis points from Friday’s 100 basis point fall. The 10 yr note at 2.61% at 9:00 a little better from earlier when the yield hit 2.64%. The rate is now as high as in 2011 before the Fed’s QE took hold. The stock market in the futures markets at 9:00 reflecting a decline of 136 points on the DJIA. There are no economic reports today but this week is heavy on key data points and Treasury auctions totaling $99B. Markets this morning reacting to concerns in China as well as Bernanke’s statement last week. China’s central bank said there’s a reasonable amount of liquidity in the financial system and urged banks to control risks from credit expansion, signaling no relief from a cash squeeze. Chinese equities entering a bear market on concern a cash crunch will hurt the economy. Bonds dropped around the world on mounting speculation the U.S. will begin curbing stimulus, while commodities declined and the dollar strengthened. US and global markets in pure panic these days; markets were completely unprepared for the rapid increase in interest rates and China’s economy falling. Given the present swift fall in US and global equity markets and the speed in which interest rates have increased is clearly evidence that between Bernanke’s comments last week and the credit crunch in China markets were caught by surprise; since last week it has been mostly reaction rather than action predicated on changing fundamentals. The US 10 yr note rate since May 3rd has increased 61% on its yield and 30 yr mortgages up about 45%. A report this morning frm a survey conducted by Bloomberg is a telltale sign that economists are confused and over the top in our view; saying the Fed will cut its purchases of treasuries and MBSs by $20B a month in September. We believe that is too radical and still depends on the data between now and then. While the economy is slowly improving we have yet to see the data that supports such a forecast. The Fed’s withdraw frm the stimulus is unlikely to be that swift and that deep in the time frame of Sept. Nevertheless, it appears based on the way markets are presently reacting that the fear is mounting. At 9:30 the DJIA opened -131, NASDAQ -36, S&P-17. The 10 yr at 2.64% and 30 yr MBS prices down 107 bp and FHA price down 135 bps. All global interest rate markets are climbing right along with US treasuries as the end approaches for central banks’ support of economies around the world. Once that sunk n last week it has been a stampeded out of fixed income investments and stocks momentarily. We have had some questions recently about where the money is going; out of fixed income and moving away from equities these days. Money doesn’t have to be invested all the time; likely a lot of it is sitting in accounts with no risk until more orderly markets can be sustained.   How much more increase is in the cards? Not an easy answer now with current market volatility. Economic data is always critical to markets, the next two weeks the data takes on even more importance with the Fed considering ending the QEs. Whether the Fed does move rapidly, or at a less aggressive pace that is now fueling the markets, depends on incoming data and the June employment report in two weeks. This week the data calendar has numerous reports on the housing sector, the strongest segment of the economy. In the meantime we expect volatility will remain high. Use any improvements to get deals consummated.