June 30, 2011

Rate Higher Fourth Straight Session

June 30, 2011

Rate Higher Fourth Straight Session

Rates are higher this week as mortgage bonds are in their fourth straight day of losses today, and have broken below a critical layer of support at the 200 day moving average. Rates rise when bond prices drop like this.

Bonds are losing and stocks gaining on the following factors:

(1) Greece passed budget cuts and tax hikes needed to secure the next payment in its bailout package granted last May. Greece is prolonging the inevitable with their bailout, but short-term, markets see this austerity vote passage as positive.

(2) S&P reported that home prices gained 0.7% in April, the first monthly gain in eight months. Markets generally ignored the fact that home prices are still down 4% year-over-year.

(3) The National Association of Realtors reported that May Pending Home Sales gained 8.2% in May and are up 13.2% since May 2010. Pending home sales measures new contracts homebuyers have entered into, and there’s no guarantee they’ll close. But again, markets are keen on the simplest bits of good news.

(4) 2yr, 5yr, and 7yr Treasury auctions were all met with weak demand, which rattled mortgage bond markets as well.

(5) Jobless claims were 428,000 for the week ended June 25, down 1000. Same story here, the short-term reaction is good for stocks, bad for bonds. But claims are still above the 400,000 mark, which is a weak market.

(6) The Institute for Supply Management (ISM) reported Chicago area manufacturing index was 61.1 for June, higher than last month and above expectations. Readings above 50 signal expansion.

Tomorrow we’ll get ISM’s national manufacturing readings to see if the Chicago data holds nationally.

Bespoke Investments reported this morning that the S&P 500 is far from overbought, so there’s still room to run there.

If so rates could worsen as bonds sold off more. The next level of support for mortgage bonds is the 100 day moving average, which is another 63 basis points below current levels, which would mean another .25% higher or more for rates.