The Day Ahead: Rates Move Higher Before Auction

Interest rates rose yesterday as stocks rallied and bond investors made room for today's $24 billion 10-year Treasury note auction. 

Equity futures continue to rally this morning after approaching calendar year highs Tuesday thanks to three positive sessions since initiated by Friday's nonfarm payrolls employment report. S&P 500 futures are 0.25 points higher at 1,354 and Dow futures are 32 points up at 12,732. The two indexes closed 10.9 points and 75.7 points higher on Tuesday, respectively. Some attributed the rally to Microsoft's $8.5 billion purchase of Skype.

The 10-year Treasury backed up six basis points Tuesday to 3.20%, denting a rally that began April 11 and pushed the notes' yield more than 40 basis points lower to its lowest since late December. Benchmark 10s are currently -4/32 at 103-10 yielding 3.228%. The yield curve is 1bp steeper at 263bps wide.  In mortgages, MND's Adam Quinones reports an uptick in originator loan sales as MBS prices seems to have hit at least a short term peak. Most of that hedging was either 4.0 coupon swaps or 4.5 coupon sales outright. The June delivery FNCL 4.5 MBS coupon is -5/32 at 102-28 and the FNCL 4.0 is -4/32 at 99-22.  (Don't forget yesterday was Class A Notification Day!)

Oil prices fell 0.78% overnight but remain in triple-digits, at $102.60 (-1.23%). Gold prices gained nearly 1% to $1,516.90 in overnight trading but are currently -0.15% at $1514.60

The just-released Mortgage Application Index from MBA bumped up 8.2% in the week ending May 6.

Refinancings, which account for nearly two-thirds of the index, moved up 9% to their highest level since mid-March, while purchases climbed 6.7%. Compared to last year, however, purchases are down nearly 26%.

MBA' Michael Fratantoni commented: "Rates dropped again last week as the Federal Reserve continued its QE2 asset purchase program. The 30-year fixed mortgage rate is now 46 basis points below its 2011 peak, and has decreased for four straight weeks by a total of 31 basis points. Over this four week span, the refinance index has increased by about 18%. Despite the recent increases however, refinance application volumes remain more than 50% below levels seen last fall."

The average 30-year fixed-rate mortgage rate fell to 4.67% in the week from 4.76%.

Meantime, China released more economic data for April, showing consumer price inflation CPI dipped less than expected to 5.3% y/y.

"That's the second straight month above 5% and suggests that China will be tightening monetary policy further," said economists at BMO Capital Markets. "While more rate hikes are likely, faster yuan appreciation appears increasing probable as well, with the National Bureau of Statistics noting that pressure from imported inflation remains high." 

Key Events Today:

8:30 - Rising petroleum prices are expected to widen the monthly Trade Deficit in March. Economists look for a $47.7 billion trade gap, up from $45.8 billion a month before. Both imports and exports are anticipated to pick up, but the pace of imports should rise faster due to oil costs. The expected widening follows a 1.7% narrowing in February.

"Petroleum imports probably increased sharply on both higher price and increased volume," said analysts at Citigroup. "Given the further price rise in April, we expect that this is not the last big increase in the oil bill." 
Economists at IHS Global Insight said trade "was close to neutral for growth in the first quarter," but they see exports carrying a little more momentum in the second quarter, while import growth slows.

2:00 - The gap in April's Budget Statement from the Treasury is anticipated to be roughly one-third of the previous month, but April is usually a time of surplus so it's not much to get excited about. Economists look for a $65 billion deficit, with estimates ranging from $16 to $75 billion. That looks relatively good next to March's $188 billion gap, or April 2010's $82.7 billion deficit. But in the first six months this fiscal year, the deficit already adds to $829.4 billion - about 15% worse than last year. 

"A strong increase in April tax receipts likely improved the budget balance," said economists at Nomura Global Economics. "We expect the budget deficit to be $42.0 billion in April, compared with a deficit of $82.7 billion for April of last year."

12:00 - Narayana Kocherlakota, Minneapolis Fed President, speaks on contingent planning for monetary policy in New York.

12:20 -Dennis Lockhart, Atlanta Fed President, speaks on the economic outlook in Atlanta.

1:00 - Sandra Pianalto, Cleveland Fed President, speaks on the economic outlook and monetary policy in Cincinnati.

Treasury Auctions:
1:00 - $29 billion 10-Year Notes