Market Snapshot 9/26/2011

Treasuries and mortgage markets opened weaker this morning with US stock indexes pointing to a better open at 9:30. Nothing happened in Europe over the weekend; lots of talk and speculation spinning around what may occur with the debt mess. Greece is at the epicenter as the clock ticks down to Oct when Greece has to have another dose of money to avoid default. Increasing conversations swirling around that Greece should actually default; the EU can't afford that to happen however. If Greece throws in the towel the fear that Portugal, Ireland and maybe Italy and Spain may take that path, that would be the end of a 12 year "experiment" in unification. But for all the concern about sovereign default in Europe, the euro remains above its average since being created almost 12 years ago, a sign that foreign-exchange traders see little chance of a collapse as officials step up efforts to keep the debt crisis from expanding.

By 9:00 this morning mortgage prices managed to hold a minor improvement from the hammering on Friday; +3/32 (.09 bp) on FNMA 30 yr mtgs. The 10 yr at 9:00 -2/32 at 1.84% generally unchanged. Treasuries have to contend with $99B of auctions this week beginning with $35B of 2 yr notes tomorrow, $35B of 5 yr notes Wednesday and $29B of 7 yr notes on Thursday.

With the Fed buying MBSs and swapping short maturities for long maturities, and saying the FF rate will stay at present lows through mid- 2013, interest rates will continue to remain low for a long time. Where the rubber meets the road though is what is the definition of low? At 1.67% the 10 yr note has backed up some, however the trend and technicals are still bullish. We continue to expect high levels of volatility such as we saw on Friday; big swings in both directions. The action in the equity markets still carries huge influence over the interest rate markets.

At 9:30 the DJIA opened +3, NASDAQ +10; 10 yr note -11/32 1.87%, mortgage prices -1/32 (.03 bp) on 30s, +3/32 (.09 bp) on 15s. By 9:50 the DJIA jumped to +100.

Next month at the ECB meeting there is increased speculation the bank will embark on lowering interest rates. The ECB had been increasing rates on concerns that inflation was increasing, that is out the window now. It should never been in the room in the first place; Europe and the US are back on the cliff edge of another recession (assuming one believes the economies actually came out of recession). Inflation is a pipe dream with very weak economic outlooks. Inflation is definitely the gorilla in the room for fixed rate investments, but these days worrying about it seems a waste of grey matter.

At 10:00 August new home sales were expected down 1.7% to 293K units (annualized); as released sales fell 2.3% but July was revised better to -0.3% frm -0.7%. 295K annualized units was about right on the number with the July upward revision. Based on sales levels there is a 6.6 moth supply, the median sales price at $209,100.00. No noticeable reaction in the bond or stock markets on the data---the only data point today.

This Weeks Economic Calendar:

       Monday;

         10:00 am August new home sales (-1.7%); as reported

      Tuesday;

         9:00 am Case/Shiller home price index for July (-4.5% annually)

         10:00 Sept consumer confidence index (46.6 frm 44.5)

         1:00 pm $35B 2 yr note auction

     Wednesday;

         7:00 am weekly MBA mortgage applications

         8:30 am August durable goods orders (+0.1%; ex transportation -0.2%)

         1:00 pm $35B 5 yr note auction

    Thursday;

         8:30 am weekly jobless claims (-4K to 419K; continuing claims 3.715 mil frm 3.727 mil)

                Q2 final GDP (+1.2% frm +1.0%)

         10:00 am  NAR pending home sales (-1.5%)

         1:00 pm $29B 7 yr note auction

   Friday;

         8:30 am August personal income and spending (income +0.1%; spending +0.2%)

         9:45 am Sept Chicago purchasing mgrs index (54.0 frm 56.5)

         9:55 am U. of Michigan consumer sentiment index (57.5 frm 57.8 two weeks ago)

Prior to the 9:30 open n the stock market the DJIA futures were trading +100 points but the open was soft, generally unchanged. The 10 yr being hit on treasury auctions this week taking mortgage prices a little lower. Last Wednesday and Thursday the bond and mortgage markets exploded on the FOMC policy statement, considering the price declines on Friday and a little weaker again this morning traders are re-thinking the magnitude of the rally and backing off. Technically we have the first support on the 10 yield at 1.87%, we hit it already this morning but so far it has held. Volatility in the bond and mortgage markets will continue this week; at these low levels markets will likely be touchy on any news as the bond market tests upside levels for rates after last week's rally.