Market Snapshot 9/29/2011

Treasuries and mortgages prior to 8:30 were a little better but data at 8:30 turned rate markets slightly weaker. Weekly jobless claims were expected to decline 4K, as reported claims were down 37K to 391K the lowest claims since the beginning of April. Continuing claims at 3.729 mil frm 3.75 mil. Q2 final GDP was expected to increase to 1.2% frm 1.0% on the prelim report last month; as reported Q2 GDP grew 1.3%. Both reports pushed the rate markets down a little and added more gains in the stock indexes; at 9:00 the DJIA +149, the 10 yr note at 2.01% +2 bp and mortgage prices -4/32 (.12 bp).

On the European scene; some positive movement from Germany.  Germany’s lower house of parliament approved the expansion of a bailout fund for debt-stricken euro- area nations to help contain the sovereign-debt crisis. The lower house voted 523 in favor of legislation aimed at expanding the powers of the 440 billion- euro ($599B) European Financial Stability Facility, while 85 voted against the measures and three abstained. The legislation is set to be debated and put to a non-binding vote in the upper house tomorrow. Greece will run out of money on Oct 13th, which of course is the drop dead deadline for Europe's leaders to act or Europe's house of debt cards will come tumbling down.

While the German vote is a big step, the consensus from investors is still negative. Bloomberg ran a survey  recently, the results were overwhelming that at least one country in the EU would be dropped in the next year. About 93% of investors expect Greece to eventually default, according to the quarterly Global Poll of 1,031 Bloomberg subscribers. Forty percent see the currency bloc losing at least one member in the next year.

At 9:30 the DJIA opened +191, the 10 yr note -7/32 at 2.01% with mortgage prices -4/32 (.12 bp).

At 10:00 NAR's July pending home sales (contracts signed but not yet closed) were expected down 1.5%; sales were a little better down 1.2%; yr/yr sales up 7.7%. Not much reaction initially. The three data points today all better than expected. The 10 yr note at 10:00 at 2.02%.

At 1:00 this afternoon Treasury will auction $29B of 7 yr notes. The 2 yr and 5 yr auctions met solid demand. Today's 7 yr should also get solid bidding.

The 10 yr note continues to hang close to 2.00%, so far unable to climb over it on a close but equally the momentum to lower rates has stalled. As we noted in yesterday afternoon the 10 yr note yield is now higher than it was prior to the Fed announcement of "Operation Twist". US treasuries at the moment are losing the safe haven trade as Europe gets closer to feed Greece more money. Moves into and out of treasuries will not completely erode; the situation in Europe and with its banks is far from resolved and in turn volatility will continue.

Technically; the 10 yr note is testing and holding its 20 day moving average at 2.03%. The 10 yr yield hasn't traded above its 20 day average since early July, then it was over its 20 day for just five sessions---take those away and the 10 hasn't been above it since the first of April. It is the same with the 3.5 FNMA  coupon; its 20 day at 101.83 is just 22 basis points below the present price. The relative strength indexes for the 10 and FNMA 3.5 are also at pivotal levels. We still do not believe rates will increase much but based on price action it is becoming less bullish.