Market Analysis

The bond market is up very slightly this morning. However, morning rate sheets are flat and for some rates slightly worse due to deterioration Friday afternoon that had not been priced into Friday’s rate sheets. For those looking to lock this morning, our current recommendation is to watch the markets during the day to see if mortgage-backed securities (MBS) can gain any traction during the day which might lead to slightly lower costs for a particular rate. However, we would watch the markets carefully and be prepared to lock should they turn negative due to the performance of today’s 30 year inflation indexed Treasury security auction.

The economic calendar is light this week. As such the markets will take most of their direction from trading activity in equities and from the performance on the US Treasury’s auction of $84 billion in 3, 10 and 30 year notes and bonds this week. Yields/rates for the longer term notes have reached levels that some believe will be very attractive to investors, particularly following last weeks worse-than-expected December Non-Farm Payroll report which cast doubts on the sustainability of the current stock market rally. However, others point to the fact that the US Treasury and Federal Reserve are no longer a buyers of US Treasury’s and that the medium-to-long term fundamentals point to higher rates due to the gigantic US budget deficits which will inundate the markets with supply of debt for the foreseeable future. Separately, for mortgage rates, the Federal Reserve, unless they change course, will be exiting the market for mortgage-backed securities in March and most analysts attribute their purchases to lowering rates from .5% to 1%. Unless the Federal Reserve extends is mortgage purchase program, almost all analysts are projecting rates in the 5.5% to 6% range by the end of the year.

Below is a recap of this week’s calendar:

Monday, January 11, 2010

Treasury Dept auctions $10 billion of 10-year inflation indexed securities

Tuesday, January 12, 2010

November Trade Balance – expected to increase to a deficit of $34.5 billion up from a $32.9 billion deficit in October

Treasury Dept auctions $40 billion of 3-year notes

Wednesday, January 13, 2010

Treasury Dept auctions $21 billion of 10-year notes

Federal Reserve’s Beige Book released – provides a detailed analysis of activity in each of the Fed’s regions.

Thursday, January 14, 2010

December Retail Sales – expected up .5% vs November’s up 1.3%. Excluding auto, expected up .3% vs up 1.2% in November.

Initial Jobless Claims report for the week ended 1/9/10 – expected down by 1,000 vs increase of 1,000 last week.

Continuing Jobless Claims report for the week ended 1/2/10 – expected down by 2,000 vs last week’s decrease of 179,000.

Treasury Dept auctions $13 billion of 30-year bonds

Friday, January 15, 2010

December Consumer Price Index (CPI) – expected up .1% vs no change in November CPI. Core rate (excluding food and energy) expected up .2% vs November up .4%.

January Empire State Manufacturing Survey - expected increase to 11.25 vs 2.55 for December.

December Industrial Production & Capacity Utilization - Industrial production expected up .6% vs up .8% in November. Capacity Utilization expected to be 71.8% vs November 71.3%.

January University of Michigan Consumer Sentiment Index – expected up to 73.8 vs 72.5 in December.