The 10 fell to its resistance level on Friday at 1.86% down 4 bps frm Thursday; we thought this morning the note would continue lower and break out of the three week plus trading range. Not the case, the 10 traded up 1 bp to 1.87%. MBS prices on Friday didn’t improve much closing the day 9 bps better on the day. MBSs also locked in narrow ranges unable to exit.
Over the weekend, talks between the government and the institutions overseeing the Greek bailout took place in Paris. Negotiations have so far yielded little in terms of progress and European officials have cautioned that discussions between the two sides are nowhere near the point where bailout money can be disbursed. Chinese officials over the weekend made an attempt to cool the negativity that exploded last week by lessening the reserve requirements of banks hoping that would spur increased lending. The decision to lessen reserves in a sense counters Friday’s news that the government made it easier to short the Chinese markets, a move to calm global markets. It was the second in less than three months and the largest in magnitude since the 2008 financial crisis.
Today Europe’s equity markets recovering a little from Friday’s selling; Hong Kong suffered their largest one-day tumble this year on Monday and trading volumes in Shanghai jumped to a fresh record, as reassurance from Beijing over the country’s slowing economy failed to persuade investors.
This week’s trading should be focused on global markets; China and Europe. US earnings also will be in play, so far 75% of earnings reported have been better than estimates. Only three economic reports but all of the them have the potential of moving US market outlooks; March existing and new home sales and March durable goods orders.
The DJIA opened +160, NASDAQ +30, S&P +14. The 10 at 9:30 1.87% +1 bp, 30 yr MBS price +2 bp frm Friday’s close and +11 bps frm 9:30 Friday morning.
This Week’s Calendar:
7:00 am MBA mortgage applications
9:00 am Feb FHFA home price index (+0.6%)
10:00 am March existing home sales (+4.5% to 5.045 mil frm 4.88 mil)
8:30 am weekly jobless claims (-8K to 286K)
10:00 am March new home sales (-3.9% to 517K frm 539K)
8:30 am March durable goods orders (+0.5% frm -1.4% in Feb; ex transportation orders +0.3% frm -.06%)
Debate within Europe and the US whether the EU and IMF will let Greece default and eventually leave the EU will be in play. If Greece leaves the EU what are the downside repercussions? Will the debt issues spread to other southern Europe countries and cascade into more defaults then threaten the very existence of the EU? Safety moves should push investors toward US treasuries with our interest rates substantially higher than other safe sovereigns. In the end we expect Greece will not leave, the possibility of other debt ridden countries leaving while remote is too great to bet on the end of Greece.
We floated over the weekend, not much benefit; thought there was a better risk that the US 10 would finally break below 1.86%; so far it hasn’t happened. Expecting two strong down days in the US stock markets continues to be wishful rather than possible. How many times in the last two months have the key indexes had triple digit moves lower (on the DJIA) only to encourage buying on any dips. Both MBS prices and the 10 yr treasury are at critical pivots, the 10 at 1.86% and FNMA 3.0 coupon at 102.63 (at 10:00 102.54). We expect the 10 will break lower but the longer it holds it lessens our enthusiasm . Friday afternoon we said if the 10 yield does break it will drop to 1.70% and MBS prices would decline 200 basis points, a freshman brain fade, MBS price would increase 200 bps.
PRICES @ 10:00 AM
10 yr note: +1/32 (3 bp) 1.86% unch
5 yr note: +1/32 (3 bp) 1.30% unch
2 Yr note: +1/32 (3 bp) 0.50% -1 bp
30 yr bond: -10/32 (31 bp) 2.53% +2 bp
Libor Rates: 1 mo 0.180%; 3 mo 0.275%; 6 mo 0.402%; 1 yr 0.691%
30 yr FNMA 3.0 May: @9:30 102.55 +2 bp (+11 bp frm 9:30 Friday)
15 yr FNMA 3.0 May: @9:30 104.92 +5 bp (+13 bp frm 9:30 Friday)
30 yr GNMA 3.0: @9:30 103.61 +8 bp (+12 bp frm 9:30 Friday)
Dollar/Yen: 119.05 +0.15 yen
Dollar/Euro: $1.0745 -$0.0061
Gold: $1195.60 -$7.50
Crude Oil: $55.54 -$0.20
DJIA: 18,039.10 +212.80
NASDAQ: 4970.79 +38.97
S&P 500: 2098.30 +17.12