August 19th, 2011 8:22 AM by Lehel S.
Very early this morning global stock markets have been hit hard again from Asia to Europe and in the US futures pre-opening trading. Last night the US 10 yr note traded down to 2.03%, it may have been lower but at 2:00 am this morning that is where it sat. At 8:00 this morning even with stocks expected to open lower again. the 10 yr note was off 10/32 at 2.10% +3 bp and mortgages were down as much as 14/32 (.44 bp) frm yesterday's close. Volatility continues to increase, as it does the risks increase, whether trading interest rates, currencies or stocks.
Today is going to be very interesting in the bond and mortgage markets; at 9:00 the 10 yr note traded down 5/32 at 2.09% +2 bp and mortgage prices were down 14/32 (.44 bp) frm yesterday's close. At 9:00 the DJIA -137, NASDAQ -22, and S&P -15, and gold up $31.00. That US treasuries and mortgages are trading lower with the stock market also being hit goes contrary to what has been the norm for months. The question now, and one that I don't have an answer, have the US interest rate markets hit their lows in yields? Yesterday the 10 yr made a run down to 1.97% but it quickly jumped back above 2.00% ending the day at 2.07%, last night the 10 made another run towards 2.00% and failed again.
Just about every firm has now lowered the growth forecasts for the US economy. Recession is now the new word of the day. In Europe the banking system remains fragile; earlier this week Franceand Germany met, avoiding any comments about issuing euro bonds to shore up banks. Early this morning the EU reported it may present draft legislation along with a report on the feasibility of common bonds. More than $6 trillion has been erased from the value of global equities this month on signs theU.S. recovery is stumbling, while the cost of insuring European sovereign debt is back to levels that triggered the region’s central bank to buy Italian and Spanish bonds on Aug. 8.
Bank of America, troubled by increasing losses on mortgage foreclosures and penalties for improper foreclosure processes, announced it will cut another 3500 jobs; previously the bank cut 2500 jobs. Its stock is tumbling as are all the big banks in the US that may have counter-party risks with banks in Europe that are suffering huge losses on their stocks and losses expected when those banks have to write down sovereign debt to the Fab five countries unable to pay their debts.
There are no economic releases to think about today; the stock market trading will dominate all news again today. Going into the weekend traders are likely to level off some of the bearish trades. Although the stock market is opening lower, we wouldn't be surprised that by the end of the day losses may be pared back. Investors are scrambling for liquidity as the economic outlook has turned 180 degrees in just three weeks.
At 9:30 the DJIA opened -95, NASDAQ -24, S&P -9; the open wasn't quite as bad as futures markets were implying. The 10 yr note at 9:30 improved to -3/32 while mortgage prices were -9/32 (.28 bp) frm yesterday's closes. Trade is unusual this morning, there is no movement into US treasuries on additional safe haven buying, it looks like investors are choosing to go into gold and not treasuries, at least so far. The day is setting up for even more potential of volatility; the bond and mortgage markets are surprising traders, actually weaker on another decline in equities.
Treasuries and mortgage markets are unusually soft this morning with the stock market weaker, if the equity markets reverse and improve this afternoon treasuries and mortgages may take additional hits. Technically the 10 failing to hold at 2.00% is momentarily troubling, we have to back 60 years to find interest rates this low. By 10:00 the stock indexes have already shed their opening levels, although still weaker markets are finding some support. Be extremely careful now in floating loans; we suggest locking until the 10 yr can move below 2.00% (it can). Rates are increasing this morning. Interest rate markets at the moment are questionable as to how they will trade the rest of the day. Be very careful now.