From The Desk Of Laura Wheeler

The bond market had an uneasy feel yesterday as traders are still trying to guess what the real impact QE2 will have. From what we are reading, the consensus yesterday seemed to be that the market had bid up Treasuries too much over the past three months and there was weak support for bonds all day. The 10-year sold off to close at 2.70%, despite a decent auction. Demand was very high with direct and indirect bidders accounting for 66%. In this morning’s data, import prices rose 0.9% in October. The weaker dollar and strong demand from emerging economies has fueled an increase in commodity prices. However, the weak demand in the U.S. will prevent the increased price of raw materials to be passed on to consumers, preventing inflation. We will start to see corporate profits squeezed as a result, unless commodity prices weaken or demand increases. In other news, Initial jobless claims dropped 24k back to 435k last week. It seems that a new trend is beginning with claims trending between a 430k to 460k print. Last month we saw the first sign from payrolls that perhaps jobs are being created now. These are collectively positive signs for the labor market that it is stabilizing. Finally, the MBA mortgage application index showed an uptick in mortgage applications of 5.8% last week. Purchase applications rose 5.5% while refinance applications rose 6.0%.

The downside today has failed to take us below the 76% retracement level at 125-24 and pricing is now back around the 40-day moving average at 126-10. If we can put in a bottom at these current levels, we have a good shot at returning back to the middle of the range around 127-0 (about a 2.60yld). The 30yr auction today was a bust coming in at a 4.32 yld with only a 2.31 bid to cover. I believe this was the worst bid to cover ratio in one year’s time. While we have bounced off the lows of the session, I wouldn’t say we are out of the woods just yet until we see the close of futures at 2pm CST. The 10yr has come back, now trading down 3s at a 2.71 yld, while mtg backs are still down 6-7 ticks in the lower coupons. A reminder that the bond market is closed tomorrow so in turn, Secondary will not be accepting any new locks/relocks/floatdowns,etc until we open again on Friday. We will be open tomorrow for small maintenance issues.