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March 30, 2011

Rate Up-Trend On Optimistic Jobs Outlook & Weaker Bond Auctions

March 30, 2011

Rate Up-Trend On Optimistic Jobs Outlook & Weaker Bond Auctions

Mortgage bonds are trading higher today (FNMA 30yr 4% coupon +28 basis points) which helps make up for yesterday’s 43 basis point loss. The two day net loss on bond prices means a slightly upward rate trend because rates rise when bond prices decrease.

Yesterday the Conference Board’s March consumer confidence showed a decline, confirming the same trend last week’s University of Michigan consumer sentiment showed: consumers are rattled by higher food and gas prices. This inflationary mood was part of why bonds sold off yesterday. The other reason was yesterday’s 5yr Treasury note auction and Mondays 2yr note auction were both met with mediocre demand, putting bond markets overall in a selling mood.

That trend continued today with the 7yr note auction being poorly received by markets. Also today, private payroll provider ADP reported that the economy added 201,000 new jobs in March. Both of these data points would suggest a continued mortgage bond selloff, pushing rates up, but the reverse is happening today as mortgages are stopping losses at a key technical support level.

Tomorrow we have jobless claims for the week, and if they confirm a fifth straight week of fewer claims, the bond selling sentiment would return because that data plus the ADP data suggest a better than expected March jobs report Friday from the Bureau of Labor statistics.

We’ve began the week up-trend rate outlook, and are sticking by that view for the next two days. Not just because of Friday’s jobs report, but because bond markets are very touchy about inflation right now, and there are clear inflationary signals emerging in numerous consumer and manufacturing reports of the past 2 months.