The reaction was not what you might expect; the 10 yr note started the session at 2.02% prior to the 8:30 data; the last time the 10 was at that level was at the last FOMC meeting. One reason for interest rates increasing recently is the dollar has weakened taking a little incentive away frm foreign investors. The dollar fell to a two-month low after this morning’s GDP data; the dollar has been weakening against the euro currency the last month.
The European Commission’s economic sentiment index—a measure of business and consumer confidence—fell for the first time in five months, to 103.7 in April from 103.9 in March; it is still above 100 its longer term average. Investors turning toward Europe as thoughts that the worst is behind the region. Greece’s deepening debt crisis could restrain the broader Eurozone recovery unless some deal can be cobbled together to keep the country in the EU. Reading a few comments frm EU analysts suggests Greece could default and still remain in the EU.
Huge selling yesterday and today in the rate markets. The 10 yr, after 30 days in the range of 1.99% to 1.86%, blew out this morning generating additional selling. In the past we noted that once that range broke the initial reaction would be either strong buying or strong selling. Technical trading was dominant yesterday and early this morning. Fundamentally, foreign buying has slowed as the dollar declines. The weakness in Q1 didn’t faze the selling this morning. The 10 yr rate hit 2.09% up 9 bps, MBS prices -40 bp frm yesterday’s 46 bp decline.
At 9:30 the DJIA opened -60, NASDAQ -23, S&P -6. 10 yr recovering a little at 2.04% +4 bps after trading 2.09%. 30 yr MBS price at 9:30 -20 bps after -40 earlier. Most pricing this morning reflects the worst levels this morning.
Interest rates also jumped this morning in Europe; Germany’s 10 yr bund yield up 9 bps to 0.27% its rate has doubled in the last three sessions; the increase occurred prior to the US GDP data this morning; a very weak 5 yr auction likely part of the cause. Euro growth is gaining momentum. Europe and the US seeing a sizeable increase in rates in the last 24 hours;
At 10:00 March pending home sales; on target up 1.1% frm Feb and +11.1% yr/yr. Earlier this morning weekly MBA applications declined 2.3% after increasing 2.3% the previous week; purchases unch while refinances -4.0%.
More to come today; at 1:00 Treasury will sell $29B of 7 yr notes, with the current increase n rates it should be met with good demand; if not markets will expect more rate increases.
2:00 pm FOMC meeting, the policy statement will be released.
The trading this morning is about what we had ahead of the March FOMC meeting. Technicals all bearish now with MBSs and the 10 yr note testing their respective 100 day averages. There have been only two times the 10 has breached its 100 day since last September, each time after a few sessions rallies drove the 10 back below it. Europe and the US in the middle of monthly buying on auctions frm governments; the U.K. auctioned 10-year Gilts at a yield of 1.88%, Italy auctioned 10-year BTP's at a yield of 1.40%, and Germany held a 3.274B euro 5-year auction that was met with weak demand. This current selling is overdone, there is no real change in the near term outlooks, how markets react this afternoon is key.
PRICES @ 10:15 AM
10 yr note: -10/32 (31 bp) 2.04% +4 bp
5 yr note: -5/32 (15 bp) 1.43% +4 bp
2 Yr note: -1/32 (3 bp) 0.57% +1 bp
30 yr bond: -33/32 (103 bp) 2.76% +7 bp
Libor Rates: 1 mo 0.181%; 3 mo 0.279%; 6 mo 0.407%; 1 yr 0.701%
30 yr FNMA 3.0 May: @9:30 101.64 -20 bp (-46 bp frm 9:30 yesterday)
15 yr FNMA 3.0 May: @9:30 104.52 -21 bp (-26 bp frm 9:30 yesterday)
30 yr GNMA 3.0 May: @9:30 102.50 -14 bp (-52 bp frm 9:30 yesterday)
Dollar/Yen: 119.04 +0.18 yen
Dollar/Euro: $1.1017 +$0.0090
Gold: $1208.90 -$5.00
Crude Oil: $57.15 +$0.09
DJIA: 18,037.40 -72.74
NASDAQ: 5037.31 -18.12
S&P 500: 2106.25 -8.51