August 26th, 2011 12:43 PM by Lehel S.
Rate markets started better this morning after rates rose yesterday. The 10 yr note yield jumped 13 bp yesterday and has increased 22 bp this week. Mortgages following but haven't been hit quite as hard as the treasury market. Better economic data yesterday on July durable goods orders and what was described as a mediocre 5 yr note auction triggered a strong move in stocks as well as traders backing away after the 10 failed at 2.00%, the level it failed at at the end of 2008.
Weekly jobless claims helped the bond market a little this morning; claims were expected to decline 3K to 5K, as reported they increased 5K to 417K; last week's claims were revised from 408K to 412K. Continuing claims did decline to the lowest level since Sept 2008, to 3.641 mil frm 3.721 mil last week. The increase in claims isn't a serious increase, claims have been about 400K for weeks now. There is no increase in employment and likely will not be any improvement for the remainder of the year.
At 9:00 the DJIA was a little weaker, pointing to a down open in stocks. The 10 yr note up 16/32 at 2.23% -6 bp and mortgage prices +6/32 (.18 bp).
At 1:00 this afternoon Treasury will complete its borrowing with $29B of 7 yr notes auctioned.While we didn't think yesterday's 5 yr auction went that badly, markets took it as not as well bid as what was expected. The strength of today's 7 yr will be closely watched, farther out on the curve; if it isn't a solid auction treasuries will likely back off and prices may decline taking mortgages with them.
Most of the day's trading will be in preparation for Bernanke's speech tomorrow from Jackson Hole. Markets are with mixed thoughts about what the Fed chairman will have to say about the economy and economic outlook, both in the US and globally. Lot of talk that he will announce another Fed easing program, mostly based on last year at this conference is when he announced QE 2. While some believe the Fed will act, there are many traders not buying into another easing. QE 2 was only considered a success from the what if perspective; what if the Fed didn't buy $600B of treasuries? wouldUS interest rates increased? It didn't help the economy, it didn't increase employment and it didn't increase consumer confidence.
Warren Buffett stepped up this morning to stop the decline in BofA's stock, BofA stock has plummeted recently on increasing losses from mortgage operations. The bank made a huge mistake in hindsight when it bought Countrywide and all its bad loans. Buffett bought 50K shares of preferred stock for $5B. The bank stock jumped 25% in minutes after the news hit the wires. That Buffett is in the game will likely stabilize BofA's stock and increase confidence in the leadership at the bank.
The Buffett decision not only moved BofA stock up 25% but added overall enthusiasm to the entire equity market. The DJIA looked like it would open down after the claims data, it opened up 50 and continued to increase to +82; by 10:00 however the indexes were falling back and the bond and mortgage markets are once again improving. The 10 yr note, up 16/32 to 2.23% -6 bp prior to the Buffett news, at 9:30 up just 4/32 and back to 2.28%; at 9:45 back down to 2.25%. Mortgage prices fell back to unchanged after being up 6/32 (.18 bp) at 9:00; at 9:45 +6/32 (.18 bp). Trading in MBSs this morning has been volatile, lender pricing uncertain as to where the market was trading at the time prices were released. The rest of the day may be volatile in the stock market as well as interest rate markets; at the end of the day likely about unchanged in financial markets. By 10:00 stock indexes were lower, the 10 yr at its best level, mortgage prices also at their best levels.