The week begins with rate sheet influential MBS coupons below key support and the 10-year note trading in a bearish trend channel after key support levels were broken on Friday in a low volume environment.

10s continued their upward drift early in the London session last night fter moving mostly sideways in Asian trading. More hawkish Fed rhetoric was on the wires Saturday with St. Louis Fed President James Bullard communicating his nervous sentiments surrounding the FOMC's use of the phrase "Extended Period" to describe its low interest rate policy. Middle East/Northern Africa/Japan headlines did little to motivate the market even as the situation in Japan took a turn for the worse after high levels of radioactive water were said to be leaking from reactors. Barring a drastic downturn in developing events abroad, trading technicals remain the market's main focus though. With bearish momentum gaining traction and Treasury auctions in the week ahead, we see room for rates to run higher (but hope cheaper levels and a lack of new short positions will prevent a significant spike).

Data in the coming week is expected to be mostly positive, with manufacturing and employment reports indicating a strong recovery, but oil prices weighing on consumer confidence and their longer-term outlook.

Key Events This Week:


The just-released Personal Income & Outlays report showed spending rise 0.7% in February, ahead of the 0.6% consensus call, while incomes rose 0.3%, just missing the 0.4% forecast.

The good news in this is that spending is rising. The bad news is that most of the nominal increase is being "swallowed up by higher gasoline and food prices," said economists at IHS Global Insight before the release.

They correctly pointed out that the core PCE price index - the Federal Reserve's preferred inflation measure - would rise 0.9% year-over-year, which is "well below the Fed's target range." With prices creeping up now, any lingering deflationary fears can be set aside, they added.

10:00 - Weak housing data was a key theme last week and this week isn't likely to produce a different trend. The Pending Home Sales Index fell 2.6% in January and is expected to dip another 1% in February. This index is a tool for predicting the sales of existing homes, which fell 9.6% in February to an annual rate 4.88 million units. Sales were down in all four regions in February and median prices are down 5.2% compared to this time last year.

"The decline in prices in January and February ... likely reflects the continued pressure that distressed sales are putting on this market and this is likely to further dampen the prospects for any meaningful recovery in housing construction in 2011," wrote RDQ Economics on March 23. "From a microeconomic perspective, falling home prices and rising all cash purchases may indicate that valuations are moving towards market-clearing levels."

12:40 - Dennis Lockhart, president of the Atlanta Fed, speaks on the economic outlook to the Rotary Club of Atlanta.

4:00 - Charles Evans, president of the Chicago Fed, speaks on the economy to the University of South Carolina Darla Moore School of Business in Columbia, South Carolina.

Treasury Auctions:
11:30 - 3-Month Bills
11:30 - 6-Month Bills
1:00 - 2-Year Notes


The debate over what counts as a "Qualified Residential Mortgage (QRM)" may be coming to an end in the near future.  The Federal Deposit Insurance Corporation (FDIC) has scheduled a meeting of its Board of Directors for this  Tuesday to vote on the issue. A draft of the proposed rule will be made available to the public at that time. FULL STORY

9:00 - Too much housing inventory has been driving home prices down for the past six months, according to the S&P Case-Shiller Home Price Index. The most recent index, for December, showed prices in the 20 metropolitan areas measured falling 0.4% compared to the previous month, which left median prices 31% below their July 2006 peak. Median prices at the end of 2010 were 2.4% below the level at year-end 2009. 

Few economists have made predictions for the January figure, but those that have aren't predicting a rebound. Economists at Nomura believe January 2011 prices will be 3.2% lower than the January 2010 median. 

"In January 2011, one in every four existing home sales came from distressed properties, which were sold with an average price discount of 35%," said analysts at BBVA, citing data from RealtyTrac. 

"Looking forward, prices will tend to stabilize as the weight of auctioned homes falls and the importance of the structural factors in demand formation increases," they continued. "The increase in the number of households, the positive growth of family income and the low mortgage rates will all contribute to price stability."

10:00 - Can Consumer Confidence continue rising for a sixth consecutive month in the face of rising oil prices, high unemployment, and concerns about the economic impact of Japan's earthquake? The market doesn't think so, not by a long-shot. The consensus is for the Conference Board index to drop to 64 in March from 70.4 in the previous month - a three-year high. If a six-point drop sounds too pessimistic, consider that the range of estimates dips as low as 55.

"It's a bit tough to see why [this survey] hit three year highs in February," said forecasters at Janney Capital Markets. "Unemployment is at nearly 9%, home foreclosures just reached the highest level on record, and oil prices are spiking rapidly. ... Few things scare Americans like nuclear risk, and the worst reactor disaster since Chernobyl is bound to affect psyches, perhaps even more so than the aforementioned oil price issues," they added. 

There is, of course, some recent precedent for the pessimism. The survey's rival, published by the University of Michigan, declined to 68.2 in early March from 77.5, while one-year inflation expectations jumped to 4.6% from 3.4%.

12:45 - James Bullard, president of the St. Louis Fed, speaks on monetary policy to the 2011 European Banking and Financial Forum in Prague.

Treasury Auctions:
11:30 - 4-Week Bills
11:30 - 5-Year Notes


5:00 - James Bullard, president of the St. Louis Fed, speaks on current monetary policy to the UBS Investment Bank Dinner in London.

8:15 - The ADP Private Employment Report is anticipated to show 200k jobs were created in March, versus the 217k it said were created last month. Private job growth in the first two months of this year has averaged 203k, ADP said last month, versus an average monthly increase of 65k in 2010. Even though economists question how reliable this survey is as a forecasting tool for Friday's nonfarm payrolls report, the recent growth should add reason to be optimistic about the labor market this year.

2:30 - Tom Hoenig, president of the Kansas, speaks at the London School of Economics.

Treasury Auctions:
1:00 - 7-Year Notes


8:30 - Five of the last seven weeks have reported weekly Initial Jobless Claims at fewer than 400k, and the four-week average is currently just 385k - the lowest since July 2008. Most economists are expecting a similar figure for the week ending March 26, which would further confidence about the following day's employment report for March.

"Initial jobless claims were 387K during the March BLS survey week compared to 413K in February, which bodes well for an acceleration in hiring," noted economist Bank of Tokyo-Mitsubishi.

9:45 - The Chicago Business Barometer has been soaring recently. The measure of Midwestern manufacturing and services boasted a 22-year high of 71.2 in February, marking the fourth increase in a row. Though the March figure will likely subside a bit, it should continue to indicate strength in the two sectors. The consensus from economists is for a 70 level, with estimates in a tight range between 66 and 73. 

With one day to go before the month's employment report, the jobs component will be closely watched along with the headline. In the February report, the jobs component fell to 59.8 from 64.1.

10:30 - Jeffrey Lacker, president of the Richmond Fed, opens conference on the Changing Landscape for Credit at the Richmond Fed's Charlotte branch.

12:00 - Daniel Tarullo, Federal Reserve Governor, speaks at the Richmond Fed conference on the Changing Landscape for Credit at the Richmond Fed's Charlotte branch.

3:00 - Jeffrey Lacker, president of the Richmond Fed, meets with reporters on the sidelines of the conference on the Changing Landscape for Credit at the Richmond Fed's Charlotte branch.



New originator compensation policies go into effect.

7:00 - Charles Plosser, president of the Philadelphia Fed, speaks on the economic recovery to the Harrisburg Regional Chamber of Commerce.

8:30 - About 188,000 new jobs were created in March, the Nonfarm Payrolls Employment Report is expected to say. Such a figure would mark the sixth month of growing employment and be roughly in line with the 192k new jobs reported in February. That's the good news; the bad news is this pace "just isn't fast enough" to cut down the 8.9% unemployment rate, according to Reuters.

Economists at BTMU called this pace of labor growth "painfully slow," but noted that steady improvement continues across many sectors, just not a lot of them.

"Professional and business services, leisure and hospitality, and health care will be the strongest categories for private service sector jobs," said BTMU analysts, who predict +170k total growth including +187k private jobs with an assumed increase of +32k manufacturing jobs.

"Information, financial activities, and trade are expected to show little job growth," they added. "The government sector will continue to shed jobs, a theme that will stick all year, to the tune of -18K in March."

10:00 - Regional surveys suggest continued strength in the ISM Manufacturing Index, a key nationwide survey of the industry. The market consensus expects to see a 61.0 score in March, a robust level as anything above 50 indicates growth. The survey hit a seven-year high of 61.4 in February. 

Regional surveys, notably New York's Empire survey, plus the Philadelphia and Richmond indexes, were so strong this month that the big question is whether the ISM will be growing at an exceptional pace or a merely great one, said economists at IHS Global Insight. 

"Since the regional surveys suggested that February should have been even better than the national reading of 61.4, any 'catching up' in March could make the ISM move even higher," they wrote. "Supply-chain problems after the Japanese earthquake threaten to cause the vendor performance reading (delivery delays) to spike, but it may be too early to see that effect this month."

10:00 - Construction Spending is forecast to decline 0.3% in February, following a 0.7% dip in January that was driven by a 6.9% nosedive in non-residential private construction spending. December's index was worse: -1.6%.
Economists at Nomura note that outlays for nonresidential structures in the private sector picked up in Q4 2010, marking the first quarterly advance since early 2008. They note that construction expenditures for offices and retail spaces may had bottomed out, adding that this report should be a good indicator of the underlying trend.

AQ's latest Market Commentary from Rate Techs: Key Support Broken. Auction Supply Ahead

After stagnating near key inflection levels for what felt like an eternity,  the 10 year Treasury note has broken through a cluster of support between 3.40 and 3.42%. This directional move started last week as a technically-driven upward drift from overbought levels (3.18%).  A corrective winning streak for stocks combined with a steady trickle of hawkish Fed rhetoric then contributed to further weakness in bonds. Now today fixed income investors are using the bearish technical environment to build in a price concession for next week's $99 billion Treasury auction schedule ( 2s/5s/7s). More simply put, there has been little push back against this sell-off. Flows have clearly favored fast money short sellers. Bid wanted....

That perspective allows us to plant a few seeds of encouragement in your head before the weekend. But doesn't get us overly excited...

  1. Although quite alarming, the directional drift and subsequent breakage of key support was not backed by high trading volume and has therefore not been confirmed.
  2. Secondary Market Current Coupon MBS yield spreads touched 2-week "tights" today as investors chased current market yield valuations/price levels. These are bargain buyers putting funds to work at lower dollar prices and higher yields! That is a positive sign. Short covering was also noted earlier in the day. And more should be in the works as month end quickly approaches.  CC +2bps at 4.189%. +74/10yT. +63/10yIRS. +201/5yT.  Was just +82/10yT on Wednesday.
  3. In the same tone of "bargain buying", we have Treasury auctions next week, and they've cheapened up nicely over the past seven sessions...creating more incentive to buy at fatter yields.  Also,  Japan's central bank is able to pressure the Yen lower by purchasing dollar-denominated U.S. Treasuries, making them a likely buyer next week (year end soon for Japan as well). Our biggest concern is overseas investors continue their trend of shying away from shorter-dated debt because of their own inflation problems.
  4. Headline Driven Flight to Safety: The myriad of global issues discussed in THIS POST have not been resolved. Global markets are extremely sensitive to shocks. 

Plain and Simple: The market has largely ignored economic data and breaking news headlines all week. Investors have instead based their decisions on trading technicals... which are now looking bearish.  But volume hasn't confirmed those bearish technicals and it just so happens that we've got $99 billion in 2-year, 5-year, and 7-year debt on the auction block next week. There are no coincidences on Wall Street. Unfortunately while our gut tells us this back-up is temporary, our brain forces us to remind you of what's currently moving the bond market: TECHNICALS. And what might be at stake for mortgage rates....

From Rate Techs: Teetering on a Directional Shift: "If 10s failed to stick below 3.40%, trading technicals would lean in favor of the bear camp and a range trade between 3.40% and 3.70% would be on the table." If that scenario played out, C30 Best Execution would range from 4.875% to 5.25%.