Rates Generally Unchanged

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Rate markets started generally unchanged this morning with no news or data on the schedule all day. The stock indexes in pre-opening trading lower along with Europe’s and Asian markets also weak. After two days of Congressional testimony Bernanke didn’t generate any market response; one of the quietest testimonies we have seen from any Fed chief. Tapering still on the table but totally data dependent, that sums up all his comments. Bernanke repeated more than once that the Fed’s plans to reduce monthly buying will depend on the unfolding economic data. The debate continues; will it be in Sept or later in the year?   Presently there is high optimism that the economy is improving, as long as the reported data continues to confirm improvement, the Fed will begin cutting back. Economic data is always important; after Bernanke said the tapering will be totally dependent on economic data going forward, the importance of each report will have additional significance. He most significant monthly data is the employment report; two weeks from today the July data will be reported. The June employment data was better than what economists were expecting, another strong report will likely be the definitive answer as to when (if) the Fed will begin tapering. In the meantime look for interest rates to trade in narrow ranges.   At 9:30 the DJIA opened-26, NASDAQ -25, S&P -3. 10 yr at 9:30 2.51% -3 bp; 30 yr MBS prices +11 bps.   There really isn’t much to add today; Bernanke’s testimony didn’t have any impact on the interest rate markets. The 10 is holding in a narrowing range with the key resistance at 2.47% and support at about 2.58%. Mortgage markets also holding in tight ranges. Technically the bond market remains bearish but not quite as bearish as the last couple of weeks. Looking at the positive; if the 10 does clear 2.47% on a close, how much lower can rates fall? It is unlikely that rates will decline much if we do see a rally, at the moment there is no reason for investors to load up on fixed income investments. Interest rates have little momentum to decline as the economic outlook remains optimistic. As long as there is no reason to seek safety into US treasuries we can’t anticipate what will drive rates substantially lower. What would it take to change that outlook? A huge reversal in the stock market, some kind of turmoil with terrorists, the US increasing its presence in Syria, or anything that would send fear in investors’ minds. The present level of interest rates is still historically very low at these levels. All that said, we have to go with the market action, what traders and investors are actually doing in the market, and as of now there is no solid demand for treasuries and MBSs.