June 29th, 2011 7:24 AM by Lehel S.
At 9:00 this morning al global markets are glued to the events in Athens with the vote on austerity is taking place; in the streets police firing huge amounts of tear gas to break up protesters.The vote has been completed and it passed. Greek citizens will pay a heavy price for its government and its country over-spending for years. As we have noted many times in this column once a positive vote on spending cuts would happen the US bond market would see selling as safety trades are taken off. The US rate markets have moved higher quickly as we noted previously they would likely do onceGreece moved back from the cliff. Two days ago France got their banks to re-cast shorter term Greek debt to much longer payout terms, one necessary step along with austerity plans to keep Greece from defaulting. News out of Germany indicates it will also get their banks to follow France's necessary action.
The bond and mortgage markets have turned bearish near term, breaking most bullish technical levels in the last 48 hours. From a technical perspective, as we have mentioned a multitude of time here, both the US equity and bond markets have been at extreme overbought (bonds) and oversold (equities). It was only a matter of time before markets would turn over. It usually takes some event to trigger the swift change in over-extended markets; the Greece vote, the poor bidding on this week's Treasury auctions and comments from Jean Claude Trichet yesterday interpreted to imply the ECB will raise its base lending rates in July have combined to send interest rates higher.
Is this the end of the declining interest rate markets? It is too soon to make that call! Markets have to settle and turn back to basic economic fundamentals and calm down from the current volatility. What we can take away, when the 10 yr note trades below 3.00% it is on thin ice. Investors in US bond markets are increasingly likely to demand a higher rate of return to continue funding the US growing budget deficit as interest rates in Europe and China increase. The outlook for US economic growth also a question mark; the divide between bullish outlook and a less optimistic outlook is wide----both views not well grounded.
Monday and yesterday Treasury auctioned $70B of notes in two auctions; both failed to meet expected demand. Today Treasury will auction $29B of 7 yr notes after rates have increased 20 basis points since the close last Friday, with higher rates will the 7 yr see better demand? If not expect more selling.
Already this morning markets have been very volatile; in the bond and mortgage markets prices have had a wide range. The 10 yr note yield spiked to 3.10% at 9:00, by 9:30 back to 3.06%; mortgage prices at 9:00 -9/32 (.28 bp), at 9:30 -3/32 (.09 bp). The three stock indexes equally volatile into the 9:30 open. Expect more trade volatility through the rest of the day.
Mortgage applications decreased 2.7% from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending June 24, 2011. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.7% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 2.6% from the previous week. The seasonally adjusted Purchase Index decreased 3.0% from one week earlier. The unadjusted Purchase Index decreased 3.8% compared with the previous week and was 4.5% higher than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 0.7%. The four week moving average is down 1.5% for the seasonally adjusted Purchase Index, while this average is up 1.5% for the Refinance Index. The refinance share of mortgage activity increased to 69.5% of total applications from 69.2% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 5.8% from 5.9% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.46% from 4.57%, with points increasing to 1.19 from 0.91 (including the origination fee) for 80% loans. This is the lowest 30-year rate recorded in the survey since the middle of November 2010. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.64% from 3.70%, with points increasing to 1.11 from 1.05 (including the origination fee) for 80% loans. This is the lowest 15-year rate recorded in the survey since the beginning of November 2010.
The DJIA opened +40 at 9:30, the 10 yr note -9/32 at 3.07% +3 bp and mortgage prices -3/32 (.09 bp) frm yesterday's close. Stock indexes have rallied for the past couple of days and interest rates have increased; all about the belief that the Greek bailout would be completed, now that the vote passed it may be a buy-the-rumor-sell the fact trade today in both the stock and bond markets.
The NAR reported May pending home sales at 10:00; expected up 3.5% jumped 8.2% frm April. Yr/yr +13.4%. A better rep[ort than was thought. There was no initial reaction to the report. At 10:00 the DJIA has turned lower.