10 Year Note

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Prior to 8:30 this morning the 10 yr note was down 7/32 (22 bp) at 2.61%. At 8:30 June retail sales were up 0.4% against forecasts of an increase of 0.8%; ex auto sales unchanged against estimates of +0.5%. It was all auto sales in June, nothing on the overall sales in the month. Also at 8:30 the July Empire State manufacturing index was expected to be at 5.0, as reported the index increased to 9.46 frm 7.84 in June. The 10 yr turned around and at 8:45 up 3/32 (9 bp) at 2.58% -1 bp. Already with the week only a couple of hours old there is volatility. Intraday volatility in the bond and mortgage markets continues to be high with swings back and forth through the day; uncertainty is another way of looking at volatility.   This week there are a number of key economic reports but the main event this week s Bernanke’s testimony on Wednesday and Thursday; on Wed at the House Financial Services Committee and Thursday at the Senate Banking Committee. He has managed to twist interest rate markets into a tight knot with his recent comments, on June 19th  saying emphatically that the Fed was preparing to begin removing the Fed’s support of the bond markets by slowing its monthly purchases, that sent interest rates spiking higher, then in a speech early this month retracting a little after he was surprised at the swift increase in mortgage rates. The housing sector being the strongest sector in the economy, mortgage rates increased 5 basis points; the reaction to his remarks early this month stabilized mortgage rates in a narrow range. His testimony this week is critical, he will be grilled hard by members of the committees on the economic outlook and the Fed’s intensions.   At 9:30 the DJIA opened  +12, NASDAQ +1, S&P +1; 10 yr note yield 2.57% -1 bp and 30 yr mortgage prices +5 bps. Already volatility; early this morning the 10 yr at 2.61% and 30 yr MBS price -17 bp at 8:30. (see below for 10:00 prices)   A lot of focus these days on China and the slowdown that continues, but this morning their GDP expanded 7.5% in the second quarter, its economy expanded 7.7% in Q1. China is slowing but obviously still a lot better than here in the US. The GDP report pushed Europe’s stock markets better. U.K. home sellers raised asking prices for a seventh month to a record in July, according to Rightmove Plc, which said values will increase twice as much as previously forecast this year.   At 10:00 May business inventories, expected to be flat frm April, were up 0.1%.   Jamie Dimon told investors last week that rising interest rates could trigger a “dramatic reduction” in the bank’s mortgage profits. But according to its own analysts, the U.S. housing market will extend its recovery regardless. Refinancing, which has slumped to the lowest in two years, may drop by as much as 40% in the second half of this year according to Chase’s analysts. Now re-fis are accounting for 64% of apps according to the most recent MBA applications data last Wednesday; at one point re-finances accounted for 75% of all apps. Based on that estimate, to keep volume at the present levels purchases would have to increase 25% frm present levels with 30 mortgage rates hovering in the 4.50% to 5.00% area.   We are talking to a number of people and noting a number of comments in the media that the present levels of mortgages and treasuries are seen as being supportive to interest rate markets at current levels, and that some investors are beginning to sniff around with a little buying od long dated treasuries. The rationale is very low inflation outlooks and a slow economic growth outlook. 2.60% on the 10 yr is a lot better than 1.60%, with the Fed committed to holding the FF rate at near zero it makes a decent return when an investor can borrow at close to 1.00% and buy 120 yrs at 2.60%. I am not saying we buy into that thought but it is getting some attention since the 10 yr and mortgages have been contained in the current ranges.   Technically, the bond and mortgage markets remain bearish; neither the 10 yr or 4.0 FNMA coupon has been unable to crack their respective 20 day averages, the first level we deem critical. The FNMA 20 day at 103.80, the 10 yr 20 day at 2.50%. The 10 yr 14 day RSI at 61 (50 is the pivot). There is an increasing number of bullish comments that rates may decline a little more frm present levels; I am not arguing against that thought, there is some logic behind it but until the market itself demonstrates it we will hold to our bearish outlook based on price action, not comments.