Better Start This Morning for Mortgage Bonds

A little better start this morning in the bond and mortgage markets after the previous two sessions sent prices down and yields up. At 10:00AM, the 10yr is still under the 1.5 mark at 1.47%, and the MBSs are showing a positive sign of 12BPS.  Yesterday the DJIA achieved a new high after Monday’s new high in the S&P. Global bond markets were pressured the past two sessions on belief Japan, the UK and the ECB were about to embark on increased fiscal stimulus programs; equity markets rallied.

Late yesterday two Fed speakers, one a hawk and a voter the other a dove and a non-voter. This morning, more of the same as each has their own opinion and unfortunately, the markets are trying to see what the future may hold when it comes to the future of the Fed rate.

Early this morning weekly MBA mortgage apps reported that they were up, but not significantly on the purchase side of the table.  June import prices were up but did not meet the estimates, as well as June export prices were higher than anticipated.  Outside of an upward price surge for petroleum and a gain for foods, there is not much pressure to be seen in the June import & export price report. No inflation in these numbers but the July data may see some pricing increases as the dollar has increased after the UK vote.  Nevertheless, the inflation outlook, regardless of the Fed officials, is not an issue and likely will not be for a long time.

Theresa May will officially be the new Prime Minister in England later today. Media comparing her to Margret Thatcher the Iron Lady. She will have her hands full with the exit and the British economy in the years ahead. (WSJ): Diplomats who witnessed her interactions with EU interior ministers describe her as “very tough and to the point,” particularly on issues affecting her own country, a senior EU diplomat said. “She was always able to get out of the EU what’s most useful for the U.K.,” one of the diplomats said.

At Noon the Treasury will sell $12B of 30yr bonds re-opening the May 30yr issue. Demand for US safety into treasures has ebbed this week as we saw yesterday’s 10yr auction was the weakest in the last 7 years after the recent rapid drop in rates on the exit vote in the UK (6/23). Now after Japan’s Abe won the election in Japan markets expect increased stimulus from the country and from the Bank of England and ECB.

Monday and Tuesday the bellwether 10yr note yield increased 16BPS and MBSs dropping 36BPS.  As I mentioned, MBSs have recovered some of those losses, but the 10yr is my concern at this moment.  There is still underlying demand for safe movement to treasuries as volatility remains high and the outlook for the global economy still not strong. The stock market is not as much as a bellwether as the recent new highs may suggest. If it were not for the huge and increasing stock buybacks by companies, it is unlikely stocks would be as firm as they appear to be now. Not arguing the gains, just pointing out one of the reasons.