September 28th, 2011 7:48 AM by Lehel S.
A slightly weaker open this morning for bonds and mortgages with the key stock indexes pointing to a higher open at 9:30. Europe still holds markets by the throat; will Greece meet the terms outlined to avoid default? Experts from the European Commission, European Central Bank and International Monetary Fund will return to Athens tomorrow as officials race to put in place a package of measures that will save Greece. Euro-area finance ministers will hold an extra meeting on Greece in October amid international concerns that a default could plunge the global economy into recession.
There is reason to believe that Greece will avoid default, at least based on the rallies in equity markets around the world in the last few days. It isn't official and there are still a lot of hurdles to leap; German banks continue to object to further write downs on their Greek debt, banks and insurance companies might have to increase their contribution to the rescue package as Greece’s economy has deteriorated, Greek bonds have tumbled in recent weeks and credit insurance has soared, putting the chance of default at more than 90%. Meanwhile the European Commission refuted reports that euro-area nations are pushing for private Greek bondholders to accept larger writedowns. And the beat goes on, in over a year now the EU and ECB have been unable to create a plan to avoid sovereign debt defaults inGreece and other struggling economies. There is increasing comments from various experts that Greecewill eventually default, while European officials and the IMF stand by their work that will avoid default. At the moment markets are believing a deal will get done soon.
August durable goods orders were about what was expected, down 0.1% overall and -0.1% when transportation orders are extracted. Not strong but about what was thought after durables jumped 4.1% in July.
At 9:30 the DJIA opened +65, the 10 yr note -4/32 at 1.99% and mortgage prices were down 4/32 (.12 bp).
The MBA weekly mortgage applications were strong last week; the composite index jumped 9.3% driven by re-financing as interest rates fell on the FOMC policy statement that the Fed would increase buying of MBSs and buy more treasuries at the long end of the curve while selling shorter maturities. The refinancing index jumped 11.2% in the September 23 week while the purchase index rose 2.1%. The rise in purchase applications was due to a 4.9% rise in conventional purchase applications that offset a 0.6% decline in applications for government loans which MBA tied to the pending decline in FHA loan limits. The purchase index has been on the rise in recent weeks and the gains hint at welcome strength in tomorrow's pending home sales report. The average rate for 30-year mortgages with conforming loans ($417,500 or less) fell four basis points in the week to 4.25% with the jumbo loans ($417,500 or more) also falling four basis points to 4.51%. FHA 30-year loans fell two basis points to 4.05%.
At 1:00 Treasury will auction $35B of 5 yr notes; yesterday's 2 yr note auction met with very good demand, expectations are that the 5 yr will also see strong demand.
The bellwether 10 yr note is working on 2.00%, it held yesterday on the close and so far this morning sits at 1.99%. 2.00% is our first support, if it falls a number of our technical models will change to a more negative outlook. If that were to occur, given the Fed's support for the long end, rates are not likely to increase much. That said, the uncertainty of the outlook is high; the economic outlook,Europe's debt mess---neither is given in the outlook.