Both stocks and bonds improved today. The S&P made another new high while the 1- year note opened +2 bps then fell 2 bps from Friday’s close this afternoon. 30-year MBS prices jumped and set some lenders re-pricing. Ukraine elections got a new president and Ukraine forces inflicted serious losses to separatists. Ukraine troops killed over two dozen separatists while not taking any injuries according to Ukrainian officials. The violence increased after the election and moves the country closer to civil war; one reason US interest rates are holding in the present tight range. “The anti-terrorist operation is in an active phase,” First Deputy Prime Minister Vitaliy Yarema told reporters in Kiev today. “We’ll continue this operation until there are no terrorists on Ukraine’s territory.”
Another reason for US rates staying low: The ECB next week (June 5th) is expected to add another stimulus to help improve the EU economies. The third reason we see rates holding is the underlying belief that soon the stock market will roll over into a deep correction. Not sure now how much that view is adding but it’s out there.
Economic data this morning supports the idea that manufacturing is improving. April durable goods orders were expected to have declined 1.3%, as reported orders increased 0.8% after increasing 3.6% in March (revised from 2.9%). May consumer confidence, in line with estimates but at 83.0, is good and another support for stocks.
Treasury sold $31B of 2-year notes this afternoon. It was an average auction, a three bears auction—not too hot, and not too cold. The rate at 0.392% (WI this morning 0.39%); the bid/cover 3.52, indirect bidders took 18.8% while direct bidders got 25.2% leaving dealers with 56% of the total. Last month’s auction drew 0.447%, 3.35x bid/cover, 23.3% indirect bidders, 18.9% direct bidders; the last 12-auction averages: 0.366%, 3.30x bid/cover, 27.6% indirect bidders, 21.2% direct bidders.
Not much tomorrow. Weekly MBA mortgage applications at 7:00 am and at 1:00 Treasury will auction $35B of 5-year notes.
In the vein of health and cleanliness, and in the absence of anything worthwhile to talk about; take a look at this: Like iPhones, app-packed commodes are objects of desire in Mr. Fujimori’s Japan. The lids lift automatically. The seats heat up. Built-in bidets make cleanup a breeze. Some of them even sync with users’ smartphones via Bluetooth so that they can program their preferences and play their favorite music through speakers built into the bowl. What’s next? Where is the baby powder?
All still points to a bullish outlook. The 10-year note is now in its 7th day trapped in a 5 basis point yield range. Ukraine is still an issue at the moment keeping investors on edge, and next week’s ECB meeting is also keeping rates from increasing. Most are completely convinced rates will increase–rates are not likely to decline much more, and if they were to decline it won’t hold long. That said, at this time rates are tilted more to decline than increase. Tomorrow may be a different day but until the market tells us otherwise we will keep on keeping on.