Mortgage bond prices were slightly positive for the week amid very choppy trading conditions. We started on a positive note for bonds with lower than expected PCE inflation data. Unfortunately a steep sell off emerged Monday afternoon as we headed into the elections and the Fed meeting. The Fed kept rates in check Wednesday as expected and announced continued quantitative easing. Unfortunately the payrolls figure of the employment report was stronger than expected Friday morning, which erased a lot of the gains seen earlier in the week. For the week interest rates finished better by about 1/8 to 1/4.
The Treasury will auction $72 billion of securities this week. Strong foreign demand remains necessary for interest rates to stay low. The Veterans holiday Thursday splits the trading week.
Economic Indicator Release Date Time Consensus Estimate Analysis
As of 11/8/10, 3-year Treasury Note Auction, $32 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
As of 11/9/10, 10-year Treasury Note Auction, $24 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
As of 11/10/10, weekly jobless claims Wednesday, an indication of unemployment. Higher figure may lead to lower mortgage rates.
As of 11/10/10, Trade Data Wednesday, deficit Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
As of 11/10/10, 30-year Treasury Bond Auction, $16 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
As of 11/12/10, U of Michigan Consumer Sentiment Friday, an indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates.
Trading This Week
Market conditions that often lead to mortgage interest rate volatility are thin trading and shortened trading weeks. If very few market participants are buying and selling bonds, the potential for short-term volatility is escalated. A large buyer or seller can execute trading orders that, without additional traders to buffer out the extreme buying or selling, can lead to swift market movements. In addition, shortened trading weeks have the potential to compress a week's worth of trading into fewer days. Bond traders often take defensive positions ahead of weekends and holidays to guard against unforeseen events that could possibly jeopardize their investments. This positioning can be beneficial or detrimental to mortgage interest rates. If investors sell stocks and buy mortgage-backed securities, mortgage interest rates will improve. However, if investors sell mortgage-backed securities and hold cash positions, mortgage interest rates will rise.
Holidays can often result in volatility as trading resumes following the extended close. The Fed continues to state the goal of low interest rates for some time. It is hard to argue they have not been effective with that goal. That doesn't mean we haven't and won't see any interest rate volatility. The Fed also noted recently that inflation is below their preferred levels. Recent history attests to spikes and drops in rates throughout the year.
This week could result in market swings that are favorable or negative in nature. A cautious approach to interest rate exposure is prudent considering the heightened possibility for mortgage interest rate volatility.