Friday, 3/19/10 10:10 AM
Treasuries and mortgages were under pressure yesterday, today the interest rate markets opened weaker following the selling yesterday afternoon. At 9:00 this morning the 10 yr note was off 5/32 with its yield at 3.70% +2 BP, mortgage prices at 9:00 -7/32 (.22 bp), the DJIA index traded up 8 points. Today is quadruple witching day, expirations of futures contracts, options and indexes; gets a lot of talk and potential volatility but most times nothing develops. There are no economic reports today and none next Monday, the markets will search for news to trade on, mostly market noise but traders need to trade, its an addiction for most of them.
Speculation is increasing among economists that the Fed may increase the discount rate again, maybe before the next FOMC meeting on April 28th. The Fed increased the discount rate on Feb 18th to widen the gap between the FF rate and the discount rate from 0.25% to 0.50%; traditionally the spread between the FF rate and the discount rate has been 100 basis points. The discount rate is the rate banks are charged when they go to the Fed window to borrow. Banks only use the window when they need short term cash, it isn't designed for long term borrowing and back in the day before the recession when a bank borrowed at the window it lit up regulators that there may be a problem with the bank. These days banks are still struggling with capital issues so it isn't as nefarious as in the past if a bank uses the window. So far 195 banks have failed in the recession and more will be failing; there are currently 270 banks that are considered "troubled". The Fed has made it clear that increasing the discount rate isn't any change in monetary policy, the Fed is still going to keep the FF rate at its present 0.25% to 0.00% for most of this year according to most pundits.
Here comes health care; The House is expected to vote on it on Sunday. How markets will react is unclear, some health care type stocks may improve while others may suffer. Looks like Democrats in both houses have the votes but it will be tight and certainly a political victory for Dems with Republicans almost totally against the bill as it is constituted. Democrats need about six more votes from House members to pass a U.S. health-care overhaul, Obama administration officials said today. A WSJ poll on March 16th had only 36% of the 1000 polled liking the plan that will likely be passed. Why are we concerned with it? The bill is a $940B bill over the next 10 yrs that will increase the cost of insurance, increase taxes, increase Medicare costs; many market analysts we speak with are seeing this bill and the way it will be rammed through as a negative to the markets. Health care reform is absolutely necessary, but this politically manipulated plan will not go down well. And as for the $130B of deficit reduction over 10 yrs, the likelihood of it actually occurring is questionable.
Not much to focus on today; its Friday, its quadruple witching with options, futures contracts and indexes expiring. Its NCAA tournament time with the same old comments that it will cost businesses $1.3B in wasted worker hours. Of course that is BS; even though many will focus on the games, they will also get their work done, and these days $1.3B is pocket change. Pres Obama will speak this afternoon to pump up support for his health care bill; not a factor for markets.
Treasury markets have recovered much of the early price weakness; the 10 yr has climbed back to almost unchanged and mortgage prices while still weak are stabilizing. Trading volume in the bond and equity markets has been very anemic this week and may be the same today. Stock indexes keep climbing but not with much volume, investors are not as bullish as the market is.
PRICES @ 10:00 AM
10 yr note: 99.14 -2/32 3.69% +1 BP
5 yr note: 99.22 -2/32 2.44% +2 BP
2 Yr note: 99.25 -1/32 0.98% +2 BP
30 yr bond: 100.16 +4/32 4.59% unch
Libor Rates: 1 mo 0.245%; 3 mo 0.277%; 6 mo 0.423%; 1 yr 0.875%
30 yr FNMA 4.5 Apr: @9:30 100.25 -6/32 (.18 bp) (-10/32 (.32 bp) frm 9:30 yesterday)
15 yr FNMA 4.0 Apr: @9:30 101.26 -3/32 (.09 bp) (-6/32 (.18 bp) frm 9:30 yesterday)
30 yr GNMA 4.5 Apr: @9:30 101.12 -4/32 (.12 bp) (-10/32 (.31 bp) frm 9:30 yesterday)
15 yr GNMA 4.0 Apr: @9:30 102.14 -3/32 (.09 bp) (-8/32 (.25 bp) frm 9:30 yesterday)
Dollar/Yen: 90.50 +0.15
Dollar/Euro: $1.3548 -$0.0053
Gold Apr: $1123.80 -$3.70
Crude Oil Apr: $82.05 -$0.15
Goldman-Sachs
Commodity Index: 528.24 -1.14
DJIA: 10779.24 +0.07
NASDAQ: 2386.27 -5.01
S&P 500: 1164.80 -1.03