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The rally in the bond and mortgage markets is continuing this morning, Europe stock markets weaker and US equity markets set to open lower at 9:30. Dec personal income and spending at 8:30 was in line with estimates; income up 0.5% against estimates of +0.4%. Dec spending unchanged against estimates of +0.1%; more evidence that holiday shopping didn’t meet those early lofty estimates. Spending stalled in December as Americans used a jump in incomes to restore depleted savings, indicating the biggest part of the economy will not be a driver of the expansion.
 
Last week Greek officials were “confident” that they could make a deal with creditors to fend off another debt default cliff. Nothing happened, not necessarily a surprise as we have been subjected to the continual uncertainty and lack of progress for two+ years now. Greece signaled opposition to economic oversight in exchange for aid, taking Italian interest rates higher this morning and driving equity markets lower. European Union leaders gather in Brussels today for their first summit of 2012 to put the finishing touches on a German-led deficit-control treaty and endorse a 500 billion-euro ($661 billion) rescue fund to be set up this year. Greece and its private creditors said Saturday they expect to complete a deal in coming days after bondholders signaled they would accept a bigger cut in their debt holdings----it never ends.
 
The DJIA opened -100; 10 yr note +17/32 1.83% -7 bp and MBS 30 yr prices +6/32 (.18 bp).
 
This week’s elephant is the Jan employment report on Friday; current estimates are an increase of 160K non-farm jobs and private non-farm jobs +170K, the unemployment rate at 8.5%. The actual unemployment rate is closer to 16% however, that the “official” rate is at 8.5% is evidence that many have simply dropped out of looking for jobs. Until the Fed revised estimates for growth downward for 2012 and 2013 last week and Q4 GDP advance report was weaker than forecasts (+2.8% against +3.1% expected) there was an increasing belief the economy was gaining a little momentum. Now economic bulls are re-thinking that idea.
 
The bellwether 10 yr note is working on a key resistance level at 1.80% this morning. In early trade it dropped to 1.82% and at 10:00 sitting at 1.83%. The MBSs are pushing into new highs in prices not seen in over a year. The Fed’s decision to leave the FF rate at 0.0% for the next three years and with no inflation now or on the horizon, the long end of the curve is seeing buying as investors seek yield. The safety trade over Europe’s debt crisis has ebbed recently but still plays a role in the decline in rates.

Mortgage Rates Improve For a 3rd Straight Day, Nearing All-Time Lows Again

Mortgages Rates continued their march into better territory today, capping a 3 day effort of improvement following Wednesday's FOMC Announcement.  At this point, rates have not only solidified their re-entry into 3.875% Best-Execution levels, but some lenders are once again competitively priced at rates below that (for detail on "best-execution," READ THIS POST).

That said, we've seen a high degree of stratification over the past 3 days as lenders have responded to the bond market rally at different paces.  When we say that rate offerings are more stratified, we're talking about various lenders offering increasingly different rates to the same type of borrowers.  At a good handful of lenders in our survey, best-execution rates are still at 4.0%, while the bulk have moved down to 3.875%.  But a few outliers now stand at 3.75% with the leaders being quite a bit further away from the laggards than normal.

This isn't too surprising considering the uncertainty leading up to the FOMC Announcement and the pace of the rally that followed.  Given more time to adjust, lenders will tend to get closer and closer together when underlying markets are stable and always be prone to a but of stratification when markets are on the move (especially when those moves result in shifting Best-Execution rates as opposed to simply minor changes in closing costs). 

Today's BEST-EXECUTION Rates

30YR FIXED -  3.875% mostly, with a few lenders at 4.0% still, fewer still at 3.75%
FHA/VA -3.75%
15 YEAR FIXED -  3.25% now
5 YEAR ARMS -  2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations

Rates and costs continue to operate near all time best levels
Current levels have experienced increasing resistance in improving much from here
There are technical reasons for that as well as fundamental reasons
Lenders tend to get busier when rates are in this "high 3's" level and can throttle their inbound volume by raising rates or costs.
While we don't necessarily think rates are destined to go higher, given the above facts, there seems to be more risk than reward regarding floating
But that will always be the case when rates operating near historic lows
(As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

It wasn’t a good week last week in the bond and mortgage markets; interest rates increased on increasing optimism the US economy can improve even in the face of Europe’s slide, and reduced need for safety in US treasuries. The 10 yr note yield increased 15 bps last week, mortgage rates up 8 basis points; this morning early prices continue to fall as early activity pointed to a better open in the equity market. At 8:30 the 10 at 2.06%, up 3 bp frm Friday’s close, MBS prices at 8:30 -5/32 (.15 bp). At 9:30 the DJIA was expected to pen a little better, it opened down a fraction (-8), the 10 yr note traded at 2.07% +4 bp -14/32; mortgage prices at 9:30 -8/32 (.25 bp).
 
There are no economic releases this week until Wednesday. The week is focused on the FOMC meeting that starts tomorrow and ends Wednesday with the policy statement. Treasury will auction its monthly ration of $99B in 2 yr, 5 yr and 7 yr notes. The Eurozone of course is always in play these days, any significant comments from leaders of the EU, ECB and IMF will get traders’ attention. Technically, the bond and mortgage markets, after last week’s selling, are now slightly bearish. We talked about how the rate markets were losing momentum for the past two weeks, the break came last week.
 
How high will interest rates climb is the question now facing investors and traders. We don’t believe rates will increase much, at worst the 10 yr could increase to 2.15% but should hold. On the opposite side, it is very likely that the lows in rates have been put in place. As long as the US economic outlook is imp[roving, and there are no actual defaults in any Euro debt there is little reason to justify the 10 yr under 2.00% and mortgage rates at their lows of a few weeks ago.
 
Europe’s finance ministers are meeting today in Brussels, trying to advance plans to craft a long-term plan to tackle the region’s debt crisis, as banking and government negotiators continue trying to reach an agreement that will lighten Greece’s debt burden. There has been progress over the past couple of weeks, Greece and private bondholders said they had made progress in talks over the weekend in Athens. Finance Minister Evangelos Venizelos said before today’s meeting that Greece is prepared to wrap up the private-sector debt swap on schedule. “We have a very constructive cooperation with the private sector,” Venizelos told reporters in Brussels. “We are ready to finalize the procedure on time.”
 
This Week’s Economic calendar:
       Tuesday;
           1:00 pm $35b 2 yr note auction
      Wednesday;
           7:00 am MBA mortgage applications
           10:00 am Dec pending home sales (-1.0%)
                          Nov FHFA housing price index (-0.1%)
           1:00 pm $35B 5 yr note auction
           2:15 pm FOMC policy statement
     Thursday;
           8:30 am weekly jobless claims (+23K back to 375K)
                        Dec durable goods orders (+2.2%, ex auto sales +0.7%)
           10:00 am Dec new home sales (+1.5% to 320K units (annualized)
                         Dec leading economic indicators (+0.7%)
           1:00 pm $29B 7 yr not auction
     Friday;
           8:30 am Q4 advance GDP (+3.1%)
           9:55 am U. of Michigan consumer sentiment index (74.2 frm 74.0)
 
 
The bond and mortgage markets have been losing strength for two weeks as we have indicated in past commentaries. The 10 yr note won’t find much support until it hits 2.15%, now at 2.09%; not much momentary concerns to hold treasuries against Europe. US economic outlook is improving, removing another support for rates. There is some talk that the Fed may announce it will increase purchases of MBSs to keep mortgage rates low, but as long as treasury rates increase the best we can expect is mortgage rates won’t increase as much but will increase. All that said, while we do not expect rates will fall again to the recent lows we are equally not expecting rates to move radically higher.

Mortgage Rates Steady While Borrowing Costs Rise Slightly

Mortgage Rates continue to ebb and flow in the same pattern that has persisted for over a month.  The average Best-Execution interest rate for a 30yr fixed loan has remained at 3.875% during that time and the closing costs associated withtthat rate have been gently rising and falling, with increasing regularity.  We've rarely strung together 3 days in a row with movements in the same direction (i.e. borrowing costs rise very slightly 3 days in a row, while Best-Ex stays at 3.875%), and the actual difference in those costs day over day continues to be fairly minimal.

Those borrowing costs rose very slightly today, a reasonable conclusion to the previous two sessions offering all time low rate/fee combinations.  This means that whereas 3.75% was "as close as it's ever been to sharing equal recognition with 3.875% as a viable choice for Best-Execution," that's no longer the case today, but it should be noted that the buydown schedule (amount of additional closing costs required to move down in rate) at some lenders allows for scenarios with even lower rates to make sense depending on your preferences and qualifications.

Whatever your disposition toward locking vs floating, it makes sense to set yourself a "stop," of sorts, by deciding on a rate slightly higher than what you're currently being quoted, at which you'd lock at a loss if the market moves against you.  Locking in such a scenario can prove exceedingly frustrating more often than not as the higher probability eventuality has been for rates to return lower, but this pales in comparison to the potential frustration of rates NOT returning lower.

Today's BEST-EXECUTION Rates

30YR FIXED -  3.875%, 3.75% as close as it's been
FHA/VA -3.75%
15 YEAR FIXED -  3.375% / 3.25%
5 YEAR ARMS -  2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations

Rates and costs continue to operate near all time best levels
Current levels have experienced increasing resistance in improving much from here
There are technical reasons for that as well as fundamental reasons
Lenders tend to get busier when rates are in this "high 3's" level and can throttle their inbound volume by raising rates or costs.
While we don't necessarily think rates are destined to go higher, given the above facts, there seems to be more risk than reward regarding floating
But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn't always mean they're done improving.

 
Rate markets started early this morning a little weaker; at 8:30 two data points brought the treasury and mortgage markets back to unchanged. Weekly jobless claims were expected up 3K to 375K, as reported claims jumped 24K to 399K; continuing claims up 19K, the 4 wk average at 381,750 frm 374K last week. Dec retail sales were expected up 0.3%, as reported +0.1%, ex autos and trucks expected up 0.4%, as reported down 0.2%. Retail sales the weakest since last May. Two reports that should dampen the outlook for increased growth of the economy; they didn’t have the impact we would have thought. Prior to the 8:30 reports the DJIA futures were trading +70, at 9:15 +22; the 10 yr note prior to 8:30 down 7/32, at 9:15 +1/32. Mortgage prices unchanged at 9:15. 
 
At 9:30 the DJIA opened +15, the 10 yr note slipped to -1/32 at 1.91% unch and MBS prices unchanged. The US markets are ignoring the weak retail sales and increase in unemployment claims in favor of the constant and inconsistent news out of Europe. Yesterday there were reports that Germany’s economic outlook was worsening with manufacturing slowing, talk that Europe would fall back into recession. This morning European Central Bank President Mario Draghi said there are some signs the euro-area economy is stabilizing even as the sovereign debt crisis poses risks to the outlook. “According to some recent survey indicators, there are tentative signs of stabilization of economic activity at low levels,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1 percent following two straight reductions. “The economic outlook remains subject to high uncertainty and substantial downside risks,” he added. 
 
Spain and Italy successfully sold notes this morning. Spain auctioned 9.98 billion euros ($12.7 billion) of bonds maturing in 2015 and 2016, including a new three-year benchmark security, twice the maximum target of 5 billion euros set for the sale. The yield on the three-year notes was 3.384 percent, compared with 5.187 percent when the nation sold similar notes in December. Italy sold 12 billion euros of Treasury bills, meeting its target, and its borrowing costs plunged. The Rome-based Treasury sold 8.5 billion euros one-year bills at a rate of 2.735 percent, down from 5.952 percent at the last auction. The auctions were stronger than expected providing a razor thin idea that Europe’s debt issues may be waning; an idea completely wrong, Europe is headed for default and in our view another recession, the second in the last three years. That said, there isn’t any strong conviction regardless of ones outlook for Europe.
 
At 10:00, Nov business inventories, expected up 0.4%, were up 0.3%; sales up 0.3%; the inventory to sales ratio unchanged from Oct at 1.27 months. No reaction to the report.
 
Next up today; at 1:00 Treasury will auction $13B of 30 yr bonds, re-opening the 30 yr issued in Nov. The 10 yesterday and the 3 yr auction Tuesday saw good demand, likely the 30 yr will also.
 
At 2:00 Treasury will report the Dec deficit expected -$79.0B.
 
Will interest rates continue to fall? Hard to handicap the outlook given the mess in Europe; so far the technical are holding but losing a lot of momentum with investors and to some extent with traders. On recent rallies the 10yr has not declined to its previous lows, on selling it hasn’t increased more than previous selling bouts. A coiling spring with the trading range narrowing each day suggests a breakout is coming, the direction yet to be determined. The outlook for the US economy is being ratcheted up, there hasn’t been any new shocks out of Europe’s banking and credit crisis, keeping the bond and mortgage markets in narrow ranges. Safety trades into treasuries is waning, however traders and investors are reluctant to sell US treasuries.