Slow Start to Rates Trading. Auction Supply and Anti-Rate Hike Rhetoric in Focus
Good Morning. Happy Monday. UFMIP goes up today....
Mortgagee Letter 2010-02: Effective for FHA loans for which the case number is assigned on or after April 5, 2010, FHA will collect an upfront mortgage insurance premium of 2.25 percent. This policy change will increase premiums for purchase money and refinance transactions, including FHA-to-FHA credit qualifying and non-credit qualifying streamlined refinance transactions.
On Friday we learned that the labor market added (created/found) 162,000 jobs in March. There were positives and negatives embedded in the data.
First, 48,000 of the 162,000 new payroll positions were temporary Census workers ( <--- want a job?). Temporary or not, the 600,000-700,000 or so jobs that'll eventually be created by the 2010 Census will put money in the pockets of currently unemployed/underemployed Americans. Folks are re-entering the labor market as they see improved chances of landing a job. Previous data was revised for the better, adding another 62,000 jobs. Hours worked rose to 33.3 from 33.1. That may be a sign that productivity has topped out and now employers need to hire more labor to keep production stable.
On the other hand, the number of people out of a job for 27 weeks or longer rose by 414,000 to 6.5 million, or 44.1 percent of the unemployed. There were 1.0 million discouraged workers in March, up by 309,000 from February. This tells us that the government will be forced to continue social spending through emergency/extended jobless benefits for some time...
Overall the report was seen as "positive progress" by the markets. Stock futures extended a 5-week equity rally and interest rates rose following the release...albeit in extremely illiquid trading conditions as most participants were out on holiday.
The week ahead doesn't offer much in terms of scheduled data, but we do have some events that will be heavily scrutinized as indicators of interest rates to come...
We get $82 billion in Treasury supply starting with $8 billion 10 year TIPS today, followed by $40 billion 3s tomorrow, $21 billion 10s on Wednesday, and $13 billion 30s on Thursday. After a weak turnout from indirect bidders at the most recent round of Treasury auctions, all attention will be firmly focused on demand at this week's issuance. Were the most recent auctions sloppy because of waining demand for US debt? Or was it just quarter-end? Do traders see it fit to push yields higher as the economy is now gaining recovery momentum?
From my point of view, we may be overlooking inflation/rate hike concerns and rising rates in the short end of the yield curve. The 10 year TSY note yield would greatly benefit from some bully pulpit "long road to recovery" rhetoric from Ben Bernanke. Remember the last time the 10 year note hit 4.00%? July 2009...when the 2 year note yield touched 1.41%. At the time there were rumors circulating that the FOMC was considering a pre-emptive hike of the Fed Funds Rate. If we are to see the 10 yr note yield fall back into the 3.57 to 3.85% range, Fed speakers must soothe rate hike fears...which were amplified after the March payrolls number.
The short of the curve is indeed the worst performing spot on the curve this morning. Benchmark 2 yr yields are up 4 basis points while the 10 yr note is only up 1 basis point and the yield curve is 4 basis points flatter from Friday's highs. Trading volumes will likely be below average today as many schools have another day to allow parents to make their way home from Easter/Passover holiday.
Mortgages are starting the week lower in price but tighter in yield spread. This implies some bargain buying is taking place. A good sign for the post-Fed MBS Purchase Program "feeling out" process. The FN 4.5 is currently -0-04 at 99-11 yielding 4.586%. The secondary market current coupon is 4.62%. The CC yield is +66.8 bps over the 10yr TSY note and +64.5bps over the 10yr swap.
NEXT EVENT: Pending Home Sales and Non-Manufacturing ISM at 10am