Treasuries weakened across the yield curve Tuesday as bond investors expressed their nervous sentiments over a few increasingly vocal inflation hawks on the FOMC board.
The Fed's overnight lending rate
has been at an unprecedentedly low zero to 0.25% range since December
2008. Some members of the FOMC are calling for those rates to rise as
its program of quantitative easing is scheduled to conclude this summer.
Rising rates would mean that current Treasury coupons are less
attractive, which causes a sell-off. Just last night St. Louis Federal Reserve chief James Bullard said that it was unlikely that for the Fed would wait for unemployment to reach normal levels before removing monetary accommodation. FULL STORY
The benchmark 10-year Treasury yield gave up six basis points to finish at 3.49% Tuesday. 10s are currently bid 5/32 lower in price at 100-31+ yielding 3.506%. Overnight trading volumes were very low with less than 200,000 futures contracts trading as of 8AM. The 2s/10s yield curve is 2 basis points steeper at 268bps wide. In his morning note AQ called attention to rising inflation expectations with a chart illustrating wider 5-year inflation breakevens between TIPS securities and TSY benchmarks
Trading volume in the TBA MBS market picked up yesterday as day traders "rinsed and repeated" their tactical yield spread trades and investors prepared for the monthly roll on Monday and the release of the March prepayment report tonight. FNCL 4.5 prices ended the session -10/32 at 101-14. Yield spreads tightened in the morning hours and widened out into the close, ending the two-day period essentially unchanged vs. the curve. Reprices for the worse were reported.
The FNCL 4.5 MBS coupon is currently -4/32 at 101-10. AQ has the secondary market current coupon marked at 4.274%. Yield spreads are moving wider vs. benchmarks this morning as MBS cash flows extend into higher rates (higher mortgage rates = slower prepayment speeds = more MBS cash flows = higher yield).
U.S. equities were on the rebound Wednesday morning following a mixed day concluding with a marginal sell-off. S&P 500 futures are 8.25 points higher at 1,335.00 and Dow futures are 66 points better at 12,393. Light crude oil is +0.12% at 104.47. Gold is +0.53% at $1458.30. Gold hit a new intraday record high of $1,460.40 yesterday.
The just released MBA Mortgage Index showed applications fell 2% in the week ending April 1.
Refinancings declined 6.2% percent to its lowest level since February 25, while purchases increased 6.7% to its highest level of the year. A good deal of the latter, however, was due to government purchases stepping up 10.3% to its highest level since May 7, 2010.
"Purchase application volume increased last week reaching the highest level of the year, but remains relatively low by historical standards, at levels last seen in 1997," said Michael Fratantoni from MBA.
"The increase last week was due to a sharp increase in applications for government loans. Borrowers were likely motivated to apply before a scheduled increase in FHA insurance premiums that became effective last Friday." he added. "Rates were flat last week, but refinance activity fell, as the pool of borrowers who have both the incentive and the ability to qualify for a refinance continues to shrink."
Key Events Today:
12:00 - Dennis Lockhart, president of the Atlanta Fed, delivers closing remarks at the bank's Financial Markets Conference in Stone Mountain, Georgia.
The March MBS prepayment report will be released this afternoon.