How low will the 10yr Bond go?

Wednesday, September 05, 2007

ECONOMIC DATA / NEWS

Usually, I would talk about the ADP employment estimate as a guideline, but point out how much it has been off by in some past months.  However, there seems to be some support for it this time.  ADP said that only 38,000 private sector jobs were created in August.  Even when you add in as much as 20,000 government jobs, the total still only comes to a gloomy 58,000.  Economists were estimating anywhere from 83,000 on the lower end to 123,000 on the high end.  The support for the figure that I mentioned earlier came from the monthly Challenger report on layoff announcements.  Their report showed an increase of 36,562, almost all coming from the financial sector.  Unfortunately, services, the financial sector in particular, were the primary source of job growth when new job growth was stronger.  A large portion of these layoffs were not only announced in August, but actually took affect.  This means there is a very good chance that the employment payrolls will be no higher than 60,000 when the number is released on Friday.  That should put the cap on an almost guaranteed Fed rate cut on September 17, so the bond markets will probably rally ahead of that date in anticipation of the move.

Oil prices are back up to almost $75 per barrel due to supply concerns.  So, why have gas prices dipped significantly over the last several weeks?  The likely answer is that prices rose quicker than they should have early in the summer (and even pre-summer), because many analysts were adamantly speculating that the price of oil would soar in the $80 range, and possibly higher.  But, it never even surpassed the record high of $78.60 from last September, although it did come within about 25 cents.  Nevertheless, gas stations have been forced to lower prices since the expected increases never materialized, and they may be getting worried that consumers will make greater attempts to forgo purchasing gas if they are able to do so.  It is further proof that the increase use of resources is in no way a danger to core inflation at this time.

The Dow has given up 150 points already this morning.  In normal times, this would be considered a big move.  But these are not normal times.  Regardless, it is still pushing investment dollars into bonds, in addition to traders running for safe haven investments as the economic outlook becomes bumpier to say the least.  There is a good chance that the Dow will begin range trading in the high 12,000 to mid 13,000 range, with the possibility of a temporary boost from the Fed rate cut.

July’s pending home sales date was the cherry on top as far as the big jump in bond prices this morning is concerned.  I’m sorry to say, that they dropped 12% from the previous month, but rates have just recently fallen in very late July and through August.  The lower rates and greater negotiating power should help sales jump as we move into the later part of this year and into early 2008.

On the whole, the economy does appear to be weakening, and an eventual recession is looking more realistic again.  That is why we expect more money to get stuck in bonds, helping to bring rate down much further.  As this occurs, non-conforming rates should eventually follow a similar pattern, just on a later time scale.  This should boost refi opportunities, particularly for home owners who acquired loans in the last 18 to 24 months.  Purchase activity should pick up as well, especially when guidelines finally loosen from their current choked up position.

TECHNICAL ANALYSIS

Green is probably everyone’s new favorite color (if it wasn’t already your favorite color – a sign of high intelligence by the way), as the FNMA 30-year 6.0% shot 25bp higher just after 10:00 AM ET.  The much lower than expected pending home sales was the catalyst.  Prices are back well above the 10-day moving average and above 100.00 again at a price of 100.03.  The 200-day moving average, currently at 100.14, will be our next major boarder of resistance.

The 10-year Treasury yield plunged from 4.52% to 4.48% immediately after 10:00 AM ET.  This is the lowest it has been in nearly six months.  Considering the downward momentum it has already built up, I believe there is an excellent chance it will break 4.00% by the end of the year.

Read more articles on our Mortgage News page, or view our entire Mortgage News Archive.

Mortgage News & More Info

Modesto mortgage news feed provided by Winchester Lending Group