Friday, December 17, 2010
Treasuries and mortgages opened stronger today after the nice rebound yesterday afternoon; short-covering long overdue but no real new investor buying. The bearish trend won’t be easily reversed however, markets are totally convinced at the moment that 2011 economic growth will be much better than expected just two months ago. The tax cut extensions and cut in social security contribution along with other benefits that are expected to increase consumer spending have gripped markets that next year will see GDP growth of 4.0% and unemployment dropping 1.0% by the end of the year. Meantime don’t overlook the Fed’s desire to increase the level of inflation; the combo of the two elements along with less worries over Europe’s debt problems have merged to push interest rates higher.
The 10 yr note at 8:30 +12/32 at 3.40%, mortgage prices +12/32 (.37 bp) frm yesterday’s closes. By 9:30 both markets were holding; still can’t completely accept a rebound even with the markets extremely oversold in the neat term. That said, always a good thing when prices are improving.
The only scheduled data today; Nov leading economic indicators, expected to have increased 1.2%, right on +1.1%. Oct revised from +0.5% to +0.4%; no market reaction to the report.
The Obama/Republican tax cut package is headed for Obama’s desk for signing. Dems in the House reluctantly when along with the bill, Dems don’t want tax cuts for the wealthy and and increase in estate taxes but no longer have the power to get their way. Obama will sign the measure into law later today. Enough Democrats voted with House Republicans to accept the deal that Obama negotiated with congressional Republicans who gained scores of seats in last month’s election. Republicans said the bill would provide certainty about tax rates and would create jobs. Majorities of both parties supported the bill. Voting in favor were 139 Democrats and 138 Republicans, while 112 Democrats and 36 Republicans voted against it. Eight lawmakers didn’t vote.
Large investors, those that can and do move markets are closing out their books now for this year. The rest of the year will be on lighter and lighter volume; at times low volume will distort markets. The interest rate markets will likely be choppy with slightly better pricing but any improvements will not change the bearish outlook for interest rates. As long as markets lock into the view that the economy will grow in 2011 and there is no need for safety buying the bond and mortgage markets will not decline in rates very much. We hold our longer outlook that the markets are over-estimating the economic bounce in 2011, we do not believe 2011 GDP will be 4.0% as markets currently believe; that said, our opinion is the minority, we have to respect the market as it is and all signs now point to increasing economic activity and an increase in the levels of inflation. not the makings for any strong rally in the bond and mortgage markets.
Today trading will be on thin volume again; next week it will really thin out. The rest of the year should be quiet as it normally is the last two weeks of the year. Looking for more improvement in mortgage prices but not a lot; take advantage of the improvements; interest rates will not decline much. Any improvement is technical rather than fundamental.