July 20th, 2011 8:42 AM by Lehel S.
In early trading this morning (7:00 am) the 10 yr note off 10/32 at 2.92% and mortgages opened -6/32 (.18 bp); by 9:00 however the markets had firmed. The 10 yr at 9:00 -7/32, mortgage prices -3/32 (.09 bp). Early trade in the stock index futures were stronger pointing to a better open at 9:30. At 9:30 however the DJIA actually opened weaker.
A huge increase in mortgage applications last week according to the Mortgage Bankers Assoc; overall applications were up 15.5% frm the previous week led by the lowest mortgage rates of the year. Purchase apps were actually down 0.1% but re-finance apps were up 23.1% for the week; the strongest showing since last March. The share of re-finances increased to 70.1% frm 65.6% the prior week. The MBA stated the obvious; turmoil in Europe over potential defaults on sovereign debt drivingUS rates lower, driving re-finances; that is the good news for originators, the bad news---no purchase increases.
Yesterday afternoon's appearance of the Pres. saying he in essence is in favor of the proposal offered by the Gang of Six Senators to end the impasse over increasing the debt ceiling drove equity markets higher and eased concerns that there is going to be a deal. As we have noted, a debt default onUS debt was not going to happen; if for no other reason, no politician wants that on their plate. The deal isn't what conservatives want nor is it what liberals would like but neither was going to get what the wanted and everyone knew it. That said, there is still no deal yet; Congress as to pass it then Obama has to accept it.
Want to earn 40% on a 2 yr note? Buy Greek 2 years. The sovereign debt problems in Europeare still a key reason US treasury rates are maintaining low yields as investors seek safety. Tomorrow the leaders of Europe will meet in Brussels to continue to try and come up with a plan to pull the EU back from the cliff. Together with a second Greek aid package, the goal is to prove to markets that Europe has the will and the tools to prevent the 21-month sovereign debt crisis from engulfing Spainand Italy. “Nobody should be under any illusion; the situation is very serious,” European Commission President Jose Barroso told reporters in Brussels today. “It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond.”
Until there is some practical and workable plan in Europe to keep sovereign defaults from occurring, US interest rates will find support as global investors move into the safest place to park money. That said, the belief that the US will dodge its own default and all the strong Q2 earnings being reported have increased the risk appetite of investors. So far though as stocks rally the US bond market isn't being hurt and rates remain low. The DJIA opened a little weaker this morning after increasing 200 points yesterday, trying to handicap what is going on in Washington; the DJIA -5 points on the open.
At 10:00 June existing home sales, expected to be up 2.5% to 4.93 mil annualized units, as reported sales down 0.8%. 30% of sales were on distressed properties; the median sales price $184.300, based on ales there is a 9.5 months supply. The NAR reported there was a 16% cancellation rate in June; possibly due to the rapid decline in rates, but it does leave a question as to why if it wasn't due to falling rates. There was no market reaction to the report.
Yesterday the 10 yr note yield fell to 2.87% at one point, closing at 2.88%; the low a month ago was 2.85% before a huge selling binge drove the 10 yr up 40 basis points in five days and mortgage rates up 30 basis points. The rate market is currently re-testing that low, it begs the question now whether the situation in Europe is so bad that long term US rates can move much lower. All technical reads remain positive but at these low yields we continue to be very cautious; stay with the trend but be ready to move if the 10 yr note climbs back above 2.95% on a closing basis. Even if these are the lows and yields do not fall more, there is little likelihood now that rates will increase much as long as Europe's mess remains unresolved.