Treasuries and mortgage rates improved yesterday, this morning more improvement in early activity. The 10 yr at 2.89% at 9:00 AM ET -2 bps from yesterday and MBS prices at +14 bps from yesterday’s close. We have been noting the bond market is due for some correction and consolidation at present levels, but we do not expect a change in the overall bearish outlook for interest rates. The 10 yr is widely believed to have technical support at 3.00% area, the recent high rate for the 10 yr climbed to 2.96% on Wednesday.
This week’s Treasury auctions now behind, the three auctions were modest at best with demand not as firm as in the last few months. There are no economic releases scheduled today. Three Fed officials on the podium today; Wm. Dudley, NY Fed at 10:15, Cleveland Fed’s Loretta Mester at 1:30 (she is being considered for the vice chair at the Fed), at 3.40 SF Fed’s John Williams.
In pre-open trading, the US stock indexes all traded higher this morning after another choppy, wide range yesterday. Volatility will continue to remain high with investors re-adjusting positions after the sharp selloffs two weeks ago.
No particular momentary news so far today. Tomorrow Warren Buffett will release his annual letter to stockholders and is expected to lead the cheer for economic growth. He will likely comment that Berkshire recently has not been able to find good investments in equities. Berkshire has been piling substantial amounts of cash into treasuries, mostly T-Bills. It has $100B in cash that has to make a little money and nothing interesting to buy Buffet is giving it to the US government to hold. According to an article in the WSJ today Berkshire held $109 billion in cash as of Sept. 30, up from $86 billion at the end of 2016 and more than double what it had at the end of 2006. Nearly all of that was invested in short-term bills, according to Mr. Buffett. T-Bills defined as terms less than 1 year. Berkshire held more bills around the end of the third quarter than large countries such as China and the U.K. It also had more at that time than the $13.5 billion held collectively by a group of 23 primary bond dealers that are obligated to underwrite U.S. government debt sales. The release of his stockholder letter tomorrow may have impacts on markets on Monday.
Inflation fears continue, driven recently in large part by the increasing average hourly earnings. The conventional belief, that if wages increase businesses will have more pricing power to increase prices. Yesterday Sec of Treasury Mnuchin commented that higher wages don’t automatically mean higher overall prices. He's leading the cheer with comments like that in order to temper the present inflationary fears that have markets by the throat now.
Focus the rest of the day will be what the three Fed officials say. Usually, nothing expressively new but where they put their focus is key. Absent any surprises the bond and mortgage markets will likely hold at current levels the rest of the day.
PRICES @ 10:00 AM
10 yr note: +10/32 (31 bp) 2.88% -4 bp
5 yr note: +4/32 (12 bp) 2.63% -3 bp
2 Yr note: +1/32 (3 bp) 2.23% -2 bp
30 yr bond: +23/32 (72 bp) 3.17% -3 bp
Libor Rates: 1 mo 1.620%; 3 mo 1.943%; 6 mo 2.168%; 1 yr 2.449%
30 yr FNMA 4.0 Mar: @9:30 102.41 +19 bp (+17 bp from 9:30 yesterday)
15 yr FNMA 3.5: @9:30 101.84 +18bp (+10 bp from 9:30 yesterday)
30 yr GNMA 4.0: @9:30 102.67 +22 bp (++1`8 bp from 9:30 yesterday)
Dollar/Yen: 106.81 +0.07 yen
Dollar/Euro: $1.2297 -$0.0032
Dollar Index: 89.96 +0.24
Gold: $1328.90 -$3.80
Crude Oil: $62.84 +$0.07
DJIA: 25,090.25 +127.77
NASDAQ: 7251.10 +41.01
S&P 500: 2721.38 +17.42