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Market Update

AT Aug 19 ET:

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10-Yr Treasury Index

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Market Graph

April 24, 2008

US Treasuries are mixed ahead of a slew of economic releases. Today's weekly unemployment claims report is expected to show an increase of +3k adding to last week's increase of +17k. The expected increase of +3k will leave the series at it's the upper range seen over the past 5 years. Meanwhile, continuing claims are expected to increase by +6k, which would be a 4 year high. Further labor market weakness could lead to a drop in consumer confidence so the market will be watching as we approach next Friday's April payroll report. The durable goods orders report is expected to show an increase of +0.1%. Excluding transportation, durable goods orders are expected to increase by +0.5%. Despite the expected positive releases, the market is expecting weakness going forward as businesses downsize their production to balance decreased demand. Lastly, the March new homes sales report is expected to decline -10k to 580,000. The series has plunged over 57% since the peak of July 2005. In other news, the US Treasury will auction $19 bln of 5yr T Notes. The $19 bln size is up 6 bln from last year's average auction size and is $1 bln higher than March's auction.

US Treasuries ended the day slightly lower yesterday while stocks traded higher. The 2yr closed at unchanged (2.20%), the 5yr closed -1/32 (2.968%) and the 10yr closed -5.5/32 (3.743%). The Dow closed +42.99 points and the S&P closed +3.99 points. Stocks traded higher on speculation that overseas demand may counter the US slowdown. Mortgages traded wider for the first time this week as well. Profit taking from hedge funds and money managers early in the day, combined with origination flows was enough to take the basis wider. Mortgages closed approximately 7/32s wider to swaps on the day.

April 23, 2008

Mortgage Applications dropped -14.2% with purchases dropping -6.4% and refinance activity down -20.2%. The drop in applications was not unexpected as mortgage rates have been moving higher over the past few weeks due to the market sell off. With no other economic releases due out today, the market may takes its cue from equities and any first quarter results. In other news, the US Treasury will sell $30 bln in 2 year notes. The Treasury has increased its 2 year note auction size by 2 bln over the past few months. The current yield on the 2yr treasury is only 2.19%. This is obviously not a very attractive yield, especially with the Fed target rate at 2.25% and with the market expecting another rate cut to 2.0%. However, the investment community still views the issue as a safe place to park cash during the current financial crisis. However, investors who are willing to take a little more risk are likely to shy away from the issue.

US Treasuries closed the day mixed yesterday with the long end outperforming the short end. The 2yr closed -1.5/32s (2.193%), 5yr -1.5/32 (2.938%) and the 10yr closed +5.5/32s (3.691%). Many attribute the long end's outperformance to the repricing of Fed Futures. Expectations of future Fed Rate cuts has diminished in recent weeks making the short end of the curve less attractive from a yield perspective. US Stocks posted their biggest loss in more than a week yesterday as oil reached another record high and disappointing earnings from the Technology and Health Care sectors rekindled concerns of the profit slowdown could spread beyond the financial sector. The S&P 500 fell 12.2 points while the Dow fell 104.7 points. Mortgages closed the day tighter to swaps with light origination and good buying from the account base. At 3:00 PM, 5.0s and 5.5s were 6 to 7/32nds tighter to swaps and premium coupons were 2 to 4/32nds tighter. 15yrs underperformed their 30-year counterparts by about 1/32.