October 6th, 2011 7:49 AM by Lehel S.
Another weak start this morning for the rate markets. Treasuries and MBSs fell for a third day as speculation European leaders are stepping up efforts to resolve the debt crisis reduced demand for the safest assets. The risk trade is being lifted again after Germany' Merkel said yesterday she agrees that Europe's banks need to re-capitalized to take the hits on sovereign debt losses that will have to taken to save Greece and other faltering countries in the EU. The cost of insuring against default on European corporate debt fell on speculation policy makers are working on plans to inject more capital into lenders, credit-default swaps showed this morning.
For a year now it has been on again, off again on the debt issues in Greece, Portugal, Ireland,Spain and Italy. It has been ping pong as news one day positive, the next day not so much. Is this time going to different? Markets at the moment believe it will be as for the first time Germany is outwardly agreeing to support the regions banks that will have to take a huge haircut on the sovereign debt they hold from those countries facing bankruptcy. We have been here before a few times over the past six months, now however Europe is at the end of the road; either a plan is resolved now or Europewill drag the rest of the world back into recession.
The ECB was expected to cut rates this morning but left rates unchanged. German 10-year bonds erased a decline, leaving the yield little changed at 1.83%. The rate earlier rose seven basis points to 1.91%.
The only data this morning, weekly jobless claims, increased 6K to 401K. Last week's claims were revised from 3991K to 395K. Claims have been about 400K for six weeks, analysts like to think 400K is a key pivotal level in measuring employment changes. Continuing claims declined to 3.70 mil frm 3.752 mil.
Later this morning Treasury announce next week's 2, 5 and 7 yr auctions; likely unchanged from last month at a total of $99B.
The rest of the day will be preparing for tomorrow's employment report. Increasing numbers of analysts are speculating the report will show more job creation than what has been estimated (+65K non-farm jobs, +83K non-farm private jobs). Job growth at those levels is meaningless in the larger view, but with the bearish outlook so dominant any improvement is seen as positive.
The DJIA at 9:30 opened -15, the 10 yr note -12/32 to 1.93% and mortgage prices -4/32 (.12 BP).
Technically, the 10 yr is acting the same way it did when on 21st of Sept the Fed announced Operation Twist; the 10 yr rallied to 1.67% then in three days was back over 2.00%. Since then the 10 five days to drop back to 1.72% on Tuesday, from there we are back to 1.93% at 9:30 this morning (1.96% at 8:30). Huge swings in short time frames; if selling takes the 10 yr over 2.04% it will change the near term outlook to a more negative outlook, a double bottom for the 10 yr that would send mortgage rates a little higher. The Fed's increased purchases of long dated treasuries and increased MBS purchases should keep rates from significant increases, a close over 2.04% would project a move to 2.30% and mortgage rates up 25 basis points. Tomorrow's employment report and improving outlook in Europe's debt crisis will tell the tale.
Steve Jobs; 1955-2011. May he rest in peace. Probably the most important influence on the computer industry; he revolutionized how we live.