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A better start in the bond and mortgage markets to begin the week. Europe’s equity markets lower leading to a softer open in the US stock market. The 10 yr note back to 2.00% at 9:00 (2.03% Friday), MBS prices at 9:00 +6/32 (.18 bp). Interest rates remain in tight ranges, a pattern that began last November. There is an increasing clamor among analysts and traders to exit fixed income investments in favor of equities and commodities; almost every day now for weeks there is another pundit joining the pack that wants out of fixed income investments. So far about all we can take away from it is that interest rates have stopped their decline, however as we have noted previously, the rate markets are not likely to increase much.
Prior to the 9:30 open stock indexes were trading lower; at 9:30 the DJIA opened better, up 5 points. The 10 yr backed off its best level on the open but still up 7/32 at 2.00% -3 bp with MBS prices +6/32 (.18 bp).
Pressure in Europe and US equity markets this morning triggered on a report that showed that China’s exports grew at a slower pace than forecast. China’s exports are at lows that go back 12 years. China’s various economic reports recently have been weaker than thought, worrying investors that the global economy is slowing. Europe of course is falling back into recession and China’s explosive growth is slowing a little. The stock market however, opened better and continued to improve into 10:00 taking some of the early gains away from the bond and mortgage markets.
Finance ministers from the 17 nations that share the euro gather in Brussels today to approve the 130 billion-euro second bailout package for Greece. Bondholders last week agreed to exchange the country’s privately held debt for new securities. The finance ministers will also discuss Spain’s budget-cutting efforts and Portugal’s aid program.
The week’s economic data has a lot to assimilate, and focus on the FOMC meeting tomorrow. The Fed isn’t likely to change its direction on keeping the Fed funds rate at 0.25% until the end of 2014, however there is a growing belief within the FOMC that the target should be lifted in favor of keeping the rate low but couching it based on the economy and inflation expectations that are increasing somewhat. Inflation fears are increasing although businesses have little pricing power and likely won’t have for a year or so. Most concerns over inflation are based on past situations where the Fed failed to act rapidly enough to fight it, allowing the infection to spread into an inflationary spiral.
This afternoon at 1:00 Treasury will begin three days of auctions to borrow $66B. Today its $32B of 3 yr notes. At 2:00 Treasury will report the Feb budget, expected to be -$229.0B.
The near term outlook for US interest rates is flat; the bond and mortgage markets have for months been in a narrow range. There is little likelihood that rates will change much until there are new fundamentals and we don’t see where that would come from. That said, given the unsettled mid-east and in Europe as it heads into another recession shocks and surprises are not out of the equation. Technically, the 10 yr note continues to carry a very slight bearish bias although not much and most studies are not weakening, just holding steady. The rest of the day should be quiet ahead of tomorrow’s FOMC meeting and key economic data through the week and Treasury auctions today, tomorrow and Wednesday.
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