Mortgage Market

Very early this morning the US stock indexes were weak following Europe’s equity markets; the 10 yr note at 7:00 am -2/32. By 8:30 however the 10 yr note fell further, down 11/32 at 1.94% +4 bp, MBS prices -2/32 (.06 bp). This is another day with no economic data until 3:00 this afternoon when Dec consumer credit is reported (+$8.5B). At 1:00 Treasury will auction $32B of 3 yr notes, last month’s 3 yr auction drew the largest demand on record for a 3 yr note.


A little volatility early this morning when a story hit that Greece was close to a deal to avoid default, it didn’t last long though as there were no follow-up details. No one will jump the gun on Greece’s ability to get a deal with creditors resolved given that Greek officials have constantly said a deal was close and would be completed in “a few days”.


German Chancellor Angela Merkel said time was running out for Greece to accept conditions for a bailout. Meanwhile Greek Prime Minister Lucas Papademos meets political leaders today to discuss more cuts needed to get a rescue package. They have already agreed to make further cuts this year equal to 1.5% of gross domestic product, they have yet to decide how to recapitalize banks, ensure the viability of pension funds and reduce wages to increase the economy’s competitiveness. Yesterday the Prime Minister was reported to have asked for a detailed analysis from his staff on how Greece will fair if it decides to simply default.


In this global economy, markets pay a lot of attention to what is occurring in Europe and China; China’s industrial output growth will probably slow this quarter as the world economy cools and the euro area’s crisis worsens, the Ministry of Industry and Information Technology said today. “The global economy is slowing down, Europe’s sovereign-debt crisis is deepening and the downside risks to the world economy are rising with international demand still slack and global commodities and financial markets continuing to be volatile,” the ministry said. German industrial output unexpectedly dropped the most in three years in December as Europe’s debt crisis weighed on confidence and the global economic slowdown damped demand. Production fell 2.9% from November, when it stagnated, the Economy Ministry in Berlin said today. Economists had expected output to remain unchanged.


I guess it is obvious that Europe’s debt crisis is so extreme that coming up with any solution is elusive at best. Banks won’t be able to take the haircut necessary, the ECB doesn’t have the funds to absorb much of the massive debt and the IMF won’t do much until there is some kind of assurance the EU countries can manage their budgets with huge spending cuts. In the meantime the economy in Europe is teetering on the edge and holding back what might be a solid global economic rebound. In the case of Greece, if it does default the repercussions in US markets may not be as serious as investors now believe. Estimates we hear are that the US equity market might lose 3.0% to 5.0% if Greece defaults; not good but if that were all there is likely it would be recovered quickly. Where the serious implications occur is a Greek default would likely leads to other sovereigns tossing in the towel unwinding the EU.


The DJIA opened -20 at 9:30, the 10 yr note -14/32 the weakest so far at 1.95% +5 bp. MBS prices holding but likely lenders will price defensively, at 9:30 -2/32 (.06 bp).


Fed chair Bernanke will testify on the economy at 10:00 at the Senate Budget Committee.


Technically the 10 yr note is presently testing its 40 day MA at 1.95%, a close above 1.95% would support a move to 2.00%. The relative strength index is at neutral 50. Although the note looks a little soft so far today, it is unlikely that interest rates will increase much; equally as we have commented a few times, we do not believe there is a lot left in the present rally. The 10 yr has a wall at 1.80%; it is in a range between 2.00% and 1.80% and likely will stay there. Mortgage rates also confined to a 15 to 20 basis point range in rates.