Market Commentary 12/20/10

Rates improved again today as mortgage bonds continue to rally from Thursday and Friday as the same thin trading conditions that took us negative are now paring some losses.  Interest rate markets continued to rally for a second day Friday (the first two day rally of December), backing well off of six month high reached in the middle of last week. This two day rally culminated in a 9.5 basis point improvement in the ten year Treasury to 3.33% as of week’s end and a 3 basis point strengthening in the two year to 0.61%. One of the biggest trends in play, though both the early-December selloff and more recent rally, has been a massive flattening in the yield curve between the ten and thirty year maturities.  From its November high of 160 basis points, the 10s/30s spread has retreated nearly 50 basis points to 111 basis points as of early Monday activity, driven by ten year yields rising much more rapidly than thirty year yields.  Converging inflation expectations are the culprit, as the markets’ forecasts of thirty year inflation has declined while the markets’ forecasts of ten year inflation have risen.  The 5-year Treasury repos (another Fed purchase program with fake money) are helping as no auctions are scheduled this week and very light origination is giving mortgages a bid despite underperforming versus Treasuries. 

No major economic data is for scheduled today or tomorrow but we get a double-barrel full on Wednesday and Thursday with GDP, existing home sales, durable goods, inflation numbers, jobless claims, consumer confidence and new home sales.  Let’s hope we can sustain this rally in spite of a likely $99 Billion in Treasury Bond auctions next week to be financed and purchased by the Federal Reserve with newly minted money printed out of thin air. 

In the news today…     (Click on the Market Headlines attachment for more details)

- Chicago Fed National Activity Index for November Decreased -.46% from -.25 in October (don’t worry be happy)

- Yields Flatten QE2 Critics With Curve Showing Fed End (we’ll see who gets flattened)

- Fed Places 70% Per-Security Limit on Treasury Debt Holdings (it was 30%)

- ECB Bond Purchases Drop to Lowest in Almost Two Months (but still MASSIVE)

- France’s AAA Grade at Risk as Euro Debt Catastrophe Spreads (this will not end well)

- Band of Eengland Forecast to Raise Interest Rate Within Six Months (gulp!)

Reading Suggestion for Today…    Free to Choose, Milton Friedman.

Your Takeaway… Come to work every day with the knowledge that the incredibly low interest rates we all have enjoyed for years now will not last indefinitely and one tiny market or geopolitical event can change everything overnight.  Re-double your efforts to build purchase loan referral sources and don’t forget about reverse mortgages.