July 19th, 2011 8:44 AM by Lehel S.
Treasuries and mortgages started soft this morning after some selling yesterday. Two drivers, and only two these days; the debt and spending cut talks that seem like they are going nowhere and the on-going and continuing escalation of Europe's debt issues. Italy, a country much larger than Greece is now on the front burner with concerns it will need a bail-out. IN Greece the EU and IMF still can't get it together and Greece's Parliament isn't making much headway; if Greece can't be dealt with concerns that Italy will be a much more difficult problem. Bank stocks fell yesterday in Europe and fed to the USas debt default concerns increase. European Union leaders are preparing for a summit on July 21 to hammer out a solution to the Greek debt crisis, as concern deepened that it would spread to Italian and Spanish bonds. This morning Germany's Merkel dampened any potential optimism with comments that she isn't expecting much frm the meeting.
We continue to believe that at the 11th hour there will be a deal on the debt ceiling, however whatever comes out of it it won't be significant in terms of cutting spending or increasing taxes on the wealthy. To achieve any significant cuts in government spending and potential tax increases is not going to come to a head until after the 2012 elections Politicians will do what they do until then; talk a lot but accomplish little. If the US is going to actually tackle our fiscal mess it will take voters to force the issues. Will voters understand the problem and will they vote to begin to correct them?
At 8:30 this morning June housing starts and permits; starts expected up 1.75% but jumped 14.6% to 629K units (annualized). Single family starts in June were up 9.4%, the highest since Nov. June building permits were expected to be unchanged from May, as reported they increased 2.5%. No initial market reaction to the report but at 9:30 when equi8ty trading started the key indexes are doing better than expected; as noted above it is all about the debt ceiling and Europe's escalating sovereign debt problems. Although the June starts were much stronger there is little reason to expect an immediate change in the housing sector that remains in depression.
At 9:30 the DJIA opened +90, 10 yr -7/32 at 2.94% +2 bp; mortgage prices -5/32 (.15 bp). Trade volume yesterday was thin, the same is likely today. Technically the FNMA MBS has broken below its 20 and 40 day averages while the 10 yr note yield is still holding its averages. There is little reason now to become too bullish, as previously noted the level of US interest rates are at record lows, to decline further is likely to be difficult.
Bank of America Corp. posted the biggest quarterly loss in the lender’s history. The second-quarter loss of $8.83B, or 90 cents a share, compared with profit of $3.12B, or 27 cents, a year earlier. The mortgage unit’s loss widened to $14.5B from $1.5B a year earlier, on the previously announced settlement costs and additions to provisions; can we say Countrywide?
The bond and mortgage markets are likely to continue trading in about a 10 basis point yield range through the rest of the week and into next week. Safety trades into US treasuries will continue as long as Europe is in play and the US Congress and the Administration continue to debate the debt ceiling; as noted we do not believe the US will default, most of the chatter is just that; not to make light of the problem but no politician will let that happen. While the issues are far apart they will come to some half-assed deal that will avoid default but won't come close to facing reality that the US government is out of control in terms of spending----politicians' lifeblood.