Treasuries and mortgages traded better this morning prior to 8:30 economic data. The 10 yr note at 2.49% -5 bp, 30 yr MBS prices +24 bp frm yesterday’s closes. Weekly jobless claims were expected -9K, as reported down 9K to 355K; the 4 week average declined about 2800 frm last week. May personal income expected up 0.2% increased 0.5%, personal spending expected +0.4% was up 0.3%; April spending originally reported -0.2% was revised to -0.3%. The personal consumption expenditures and inflation gauge increased 0.1%, yr/yr +1.1%. Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, purchases rose 0.2% in May after a 0.1% decrease in the previous month, The two reports generally in line with estimates didn’t generate any immediate changes in the stock indexes or the bond and mortgage markets. At 9:00 this morning the 10 yr at 2.50% -5 bp, 30 yr MBS prices +30 bps.

At 9:30 the DJIA opened +87, NASDAQ +20, S&P +10; 10 yr 2.49% -6 bp and 30 yr MBS price +35 bps frm yesterday’s close.

At 10:00, a few minutes ago, NAR reported May pending home sales, expected +1.0% sales were up a huge 6.7%. Pending home sales are contracts signed but not yet closed. Not much reaction to the better report so far.  

After last week’s wild selling the bond market is settling down at slightly lower rates but the overall bias remains bearish for the bond and mortgage markets. Bernanke’s press conference last week shocked financial markets here and around the world. No one expected he would be as definitive as he was; saying the Fed was ready to begin tapering its QEs as early as the end of this year and would likely be completely done with it by mid-2014. Markets were expecting the Fed’s next move would be to begin backing off of its $85B of monthly purchases of treasuries and mortgage securities but the time frame wasn’t expected to be that soon. Bernanke said the outlook for the economy was improving and as long as the future data confirmed that the easing’s would end.

The initial reaction to his comments sent interest rates higher and dropped the stock market in excessive movements. Since then the DJIA has recovered, after falling 800 points the index has increased 200 points since Tuesday and so far this morning up another 130 points. The 10 yr note rate, driver for all long term interest rates, increased from 2.30% prior to Bernanke’s comments to 2.65% and 30 yr MBS rates increased 25 bps in a matter of a few sessions. Some retracements in markets was likely and is being motivated by comments from other Fed officials and central banks from the ECB to the Bank of China in efforts to calm markets. We warned market volatility would increase and will likely be touchy now until the June employment report scheduled for July 5^th. Most volatility will be in the bond and mortgage markets; with rates historically low it isn’t realistic to expect interest rates will decline to the lows seen just a month ago. The question now is, how much of an improvement can be expected?  

A couple of Fed officials out today; at 10:00 NY Fed Pres. Dudley. At 10:30 Fed Governor Powell talks. Dudley saying the market’s interpretation of the Fed’s intentions are not accurate; another voice trying to temper the recent shock of increased rates. He wasn’t talking about the increase in the 10 yr note, but more about short term rates which as far as we are concerned weren’t the issue. The Fed will keep the FF rate at 0.0% to 0.25% until the unemployment rate falls to 6.5% and that appears to be a long way off. He said as long as the Fed continues to buy the 10 yr note should not be any higher than 2.50%. The markets are “quite out of sync” with the Fed’s policy.

Bill Gross of PIMCO fame out this morning saying the 10 yr note should be down to 2.20% (2.49% now). Gross, a man of respect has been wrong recently about the bond and interest rate markets. A month ago Gross saying that PIMCO was divesting of some of its fixed income treasuries, then a couple of weeks ago he turned buyer just before the spike higher; now talking up his confused position that rates should be 30 basis points lower on the 10 yr. We talk a lot about uncertainty that presently dominates the markets; Gross typifies what we mean by uncertainty and volatility that is the present state in the interest rate markets.

The bond and mortgage markets, based on all momentum oscillators became oversold and now undergoing a retracement. Rate markets remain bearish in the wider perspective; in the near term there is excessive intraday volatility that implies that uncertainty is dominant in the markets. The last few days the movements through the day have been huge; MBSs opening better then selling back and finally at the end of the day ending close to unchanged from the previous day. Re-pricing from lenders has become a daily occurrence both up and down. Volatility like this is indicative of uncertainty about where rates should be under the present ever-changing outlooks. 

- Michael Corboy