March 8th, 2011 8:48 AM by Lehel S.
A little better start to the day with the 10 yr note holding a minor gain at 9:00 and mortgages following as usual. Crude oil is slightly lower on comments that OPEC members are discussing whether to call an emergency meeting. OPEC's next scheduled meeting is set for June but there are talks now about the potential need for a meeting earlier; so far according to current news wires there is no meeting set so far. Crude slipped as Kuwait’s oil minister said OPEC members are considering whether to convene an “urgent meeting” to determine whether more output is needed. Futures trimmed earlier losses after Goldman Sachs Group Inc. and Bank of America Merrill Lynch raised their oil-price forecasts. Violence in Libya, Africa’s third-largest crude producer, has cut output by as much as 1 million barrels a day, according to the International Energy Agency. The North African country pumped 1.39 million barrels a day in February, down from 1.59 million the previous month, according to recent estimates.
After a little better open early, by 9:15 mortgage prices fell back to unchanged while the 10 yr note traded off 2/32. The stock indexes prior to the 9:30 open pointing to a little better start. All about oil as has been the situation for the past month. If oil is up the equity market struggles; until the last few days if oil prices were higher the bond and mortgage markets held slight gains in prices. Since late last week however the US rate markets have lost some of the safety moves that had pushed interest rates down a tad. There isn't any reason for lower interest rates except the so-called fear factor into safety of US treasuries. With some momentary moderation of the expansion of the Mideast civil protests in the last week treasuries and mortgages are re-focusing on the improving economy and concerns that inflation may begin to increase. Last week the ECB shook up the markets with comments from Jean Claude Trichet the head of ECB that the bank may increase interest rates next month to fend off inflation increases developing in Europe.
Over night more comments of higher rates possible from the ECB; European Central Bank Governing Council member Axel Weber said he doesn’t want to correct market expectations for as many as three quarter-point increases in the bank’s benchmark interest rate this year. Inflation may be “more sustained and more fundamental” than the ECB’s latest projections suggest, Weber said. “There are a number of fundamentals in emerging markets, a number of effects which worsen the medium to long-term inflation outlook,” he said. “This has to be countered in a timely way. I do see considerable future price pressures.” The ECB last week predicted euro-area inflation will average about 2.3% this year and 1.7% in 2012. It aims to keep inflation just below 2.0%.
Why do we care what happens in Europe with their interest rates? Because if the ECB starts increasing base lending rates the US rate markets will move higher on any tightening by the Bank. Our Fed may want to hold the line with the Fed's zero to +0.25% FF rate but that won't matter at the middle and long end of the yield curve. US rates will edge higher if in fact the ECB actually follows through with their comments. The US economic recovery continues with US interest rates still historically low, traders always nervous about inflation and the reality that US rates are very unlikely to decline make any forecast for much lower interest rates questionable. We do not subscribe to the view mortgage rates will decline much, rather we believe interest rates will gradually increase.
This afternoon Treasury begins three days of more borrowing; today at 1:00 $32B of 3 yr notes,tomorrow $21B of 10 yr notes re-opening the 10 yr issued last month, and Thursday $13B of 30 yr bonds re-opening the 30 yr issued last month. Recent Treasury auctions have not been as strongly bid as in the last couple of years, the past two 2 yr note auctions in the last two months haven't gone very well, hedgers and traders are likely to be cautious with the borrowing this week.
There are no scheduled economic reports today; rate markets will focus on equity markets and the oil market as has been the situation for weeks; and the results of the 3 yr auction at 1:00 pm.