September 16th, 2011 7:23 AM by Lehel S.
Treasuries and mortgages being hit again this morning; the 10 yr note again testing its 20 day average, an average that works well for near term changes in direction. So far the 10 has found support at its 20, at 9:15 this morning the average is at 2.09% with the note trading at 2.11%. Mortgage prices at 9:15 -8/32 (.25 bp) and below its 20 day average; hart support for 20 yr MBSs is at 100-09/32, presently at 100-25/32.
In the last couple of days news out of Europe, while not close to definitive on the debt crisis with Greece and other countries struggling with default, has been somewhat more encouraging. Geithner saying there is absolutely no way Europe will suffer a Lehman event that about took down the US financial system. Germany re-affirming it will not let Greece be pushed out of the EU.Merkel, Germany's Chancellor, expanded her defense of the euro, saying Germany has a “duty” to preserve the joint currency because it helps exports, makes the country richer and underpins Europe. “The euro has proven itself, it’s good for us as an export nation” and has increased growth and prosperity in Europe’s biggest economy, Merkel said in a speech in Berlin today. “That is why it is our duty, very much in our own interest, to make our contribution to secure the euro’s future. Everything that serves the goal of securing the euro’s future must be done.” It appears Greece will dodge its next bullet with additional money to fend off default; euro-region ministers are meeting in Poland today over collateral to backstop Greece’s rescue loans as the country’s next 109 billion-euro ($151 billion) financial aid package hangs in the balance.
The debt mess in Europe is nowhere near any significant resolution or definitive plans to restructure debt in Greece, Portugal or Ireland---and Spain and Italy. There have been countless times over the last year where it was thought Europe was getting its act together, only to be dashed on the rocks of disappointment. This time is no different; there has been a huge amount of speeches and talks that all sound encouraging only to end in derision and nothing accomplished.
As long as traders believe there is a chance of dealing with Europe's banks the safety move to US treasuries lessens. Yesterday and today that is what we are seeing in the bond market, taking some of the risk trade off. Whether it will change the wider direction of interest rates is not clear; that said, taking the 10 yr note below 2.00% and sustaining it is not going to be an easy move. Although the 10 has fallen below 2.00% it hasn't held and selling quickly pushed the yield back up.
The US bond and mortgage markets still holding but weakening recently; we expect continued volatility but now with an upside bias for interest rates. It all will change however if the outlook overEurope changes. IN the end it is a touchy and uncertain environment on the rate markets now.
At 9:30 the DJIA opened +52 in a background of uncertainty. The 10 yr at 2.11% +2 bp and mortgage prices at 9:30 -8/32 (.25 bp) on 30s.
At 9:55 the only data today, the U. of Michigan consumer sentiment index. At the end of August the index was a weak 55.6, it was expected at 56.3; as reported the index was better at 57.8; the current conditions index at 74.5 up frm 68.7 in August, the expectations index at 47.0 frm 47.4, and the 12 month outlook index at 38 frm 40 in August----the expectations index is the lowest since Feb 2009. The initial reaction improved the 10 yr a little but not much. Overall the report wasn't good but so far not much reaction to it in the equity or bond markets.
Next Tuesday and Wednesday the FOMC meeting; likely the bond and mortgage markets won't change much until the statement on policy is released Wednesday afternoon. Still a lot of thinking the Fed will start another easing move of some sort. It isn't clear what the Fed may do, or whether it has anymore bullets left to help the economy. That said, the Fed does have the ability to push interest rates at the long end of the curve lower.