Last Friday: Ahead of the long Easter weekend, some glimmer of progress with the Russia/Ukraine situation and a very firm Philly Fed business index sent interest rates spiking higher with the 10-year jumping to 2.72%, up 8 bps in yield. 30-year mortgage backed securities (MBS) prices tumbled 51 bps.
This morning: The 10-year is better and MBS prices are getting a little reprieve: at 9:00 the 10-year was at 2.70% with the 30-year MBS price +17 bps. Over the weekend there was some gun fire in Ukraine with separatists being shot by “unknown” gunmen; nothing serious, however, in terms of markets. Markets remain subject to swings in sentiment about the Ukraine news; last week for a moment when Russia, Ukraine, the US and EU met in Geneva there was brief optimism that some progress might be in the offing; four days later there has been gun fire, escalating renewed concerns. Rate markets were hit very hard on Friday, this morning with less enthusiasm some small improvements in the bond market.
At 9:30 the DJIA opened quietly, +3, NASDAQ +7, S&P +1; 10-year note 2.70% -2 bp and 30-year MBS price +14 although FHA price -16 bps.
At 10:00 March leading economic indicators, that was expected up 0.7%, was reported up 0.8%; a very good number but given the recent data not a surprise.
The US 10-year note on a global comparison is yielding more than G-7 country averages. Treasury 10-year notes yielded 67 basis points more than their counterparts last week, the most in four years; as the Fed unwinds its bond-buying program, while Japan and Europe consider additional purchases. The Bloomberg Global Developed Sovereign Bond Index (BGSV) has gained 3.4% this year, versus a 4.6% decline in 2013.
Where are those higher interest rates that most everyone was forecasting this year? So far bets that rates would increase have come up losers as the Fed is relentless in talking and doing things that have kept rates down; good for mortgages and potential home buyers, but not many are buying into the reality that higher interest rates are inevitable. How long the Fed can enjoy the success of keeping rates at the present levels is a question that big investors have gotten wrong so far this year. Differing comments from Janet Yellen have kept interest rates tied in very narrow ranges now for the last three months. At the March 19th FOMC meeting, Yellen stirred the pot with her remarks that after the end of tapering (expected in October) six months later the Fed would begin increasing the FF rate; last week she back-pedaled saying the Fed was in no hurry to increase rates. The Fed’s new strategy? Keep them guessing, keeping rates stabilized?
This week: Treasury will auction $96B of 2s, 5s, and 7-year notes. This week existing and new home sales, along with the FHFA housing price index, are key data points; also March durable goods orders, another significant report. The Fed and ECB are increasingly worried that inflation is not occurring as the banks’ expected by this time in the recovery. Mario Draghi and Janet Yellen have increased outward concerns that the economies still are soft enough to keep pricing pressures at bay.
When will interest rates begin to increase? So far those that have bet by now rates would be 25 bps higher than they are have taken sizable losses on that investment. Nevertheless, there shouldn’t be any doubt interest rates will increase; when they will break out of the present long narrow range is keeping traders on edge. It is expected that the US stock market will experience a significant decline, but so far it hasn’t happened. The primary focus is on the near-term outlook; rates for the present are not likely to change much in the next few weeks.
This Week’s Economic Calendar:
10:00 am March leading economic indicators (as reported +0.8%)
9:00 am FHFA Feb housing price index (+0.3%)
10:00 am March existing home sales (4.56 million units -0.7%)
1:00 pm $32B 2-year note auction
7:00 am weekly MBA mortgage applications
10:00 am March new home slews (455K units +3.3%)
1:00 pm $35B 5-year note auction
8:30 am weekly jobless claims (+8K to 312K)
March durable goods orders (+2.0%, ex transportation orders +0.9%)
1:00 pm $29B 7 yr note auction
9:55 am U. of Michigan consumer sentiment index (82.6 from 82.6)