Yesterday interest rate markets
improved, the 10 fell 4 bps to 2.70% and 30 yr MBS prices gained 35 bps in
price. This morning no follow-through early; the rate markets remain range
bound within an extremely narrow range, no direction but the outlook is a
little better. The 10 opened at 2.71%, at 10:15 2.69% -1 bp.
The 10 in a five bp yield range and 30 yr MBSs in a 50 bp price range. This
morning the stock market is better, still the S&P has not been able to
close in a new all-time high. From everything we are hearing and reading
investors in stocks, even the most optimistic, are worrying that after the huge
run up in 2013 the stock market may be momentarily running out of momentum.
That view is likely why the interest rate markets have bucked the obvious and
not increased. Although interest rates have held well for the last few weeks,
there hasn’t been any significant change in rates; how much longer will the
tight range remain is dependent on what happens in the equity markets. If the
S&P closes at a new high and holds it for a day or two it will take away
some hedging by investors that are holding treasuries currently.
The DJIA opened +17,
NASDAQ +13, S&P +3; 10 yr 2.71% +1 bp with MBS prices unchanged from
yesterday’s nice rally. Not much movement on the open and ahead of Jan new home
sales at 10:00. Going into the new home sales the indexes had turned lower.
Bloomberg runs a lot of surveys
with economists, nice to know what the dismal scientists are thinking. According
to economists surveyed the yield on the 10 yr note will be 3.37% by year-end,
with the most recent forecasts given the heaviest weightings. The move would
hand a 2.8% loss to an investor who buys today, data compiled by Bloomberg
show. If that becomes reality 30 yr mortgage interest rates at the end of the
year will be about 50 to 60 basis points higher than where they sit now. The
forecast is obviously predicated on the economy continuing to strengthen and a
pick-up in the inflation rate. While we believe interest rates will increase,
we are not quite that bearish. Essentially we are not that optimistic that the
economy will expand at a pace presently widely believed. Improvement yes, just
not what most presently assume when forecasting interest rates.
At 10:00 the economic data of the
day; Jan new home sales, expected down 3.4% to 400K units (annually), were up
9.6% to 468K units, the strongest sales month since July 2008. Dec sales were
revised higher, to -3.8% at 427K from 414K.
It is a volatile series but that was a huge surprise. The reaction sent stock
indexes back into positive readings but didn’t change the rate markets much.
New home sales are not as significant as existing home sales because the data
is a narrower sample. Earlier this morning the weekly MBA mortgage
applications took another fall, last week down 4.1%, this week -8.5% for
the overall index. The purchase index -4.0% while re-financing fell 11.0%;
re-financings appear to be waning recently even though rates are still
favorable. Possibly everyone that wanted to re-finance already has done it. The
percentage of re-finances to overall apps dropped to 58%, the lowest since Sept
2013.
This afternoon Treasury will
auction $35B of 5 yr notes and $13B of 2 yr floating notes.
Yesterday’s 2 yr auction had strong demand but there is little correlation
between the demand for 2s and demand for 5s and tomorrow’s 7 yr auction.
Tomorrow morning Janet Yellen is scheduled to complete her required semi-annual
testimony at the Senate Banking Committee, delayed by almost two weeks due to inclement
weather in Washington.
Regardless
of the outlook for higher interest rates, the technical picture is still
slightly bullish for the 10 and MBSs. The 10 holding under its 2, 40 and 100 day averages and the 14 day
relative strength index below 50. We have to stay with the technicals, there
isn’t a lot of buying but equally there is no significant selling. The reasons
may be murky and debatable but the market is where talk ends and money takes
center stage. 
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