Why are rates at 13-month lows and will it last?


A great start this morning. The 10-yr was down 7 bps from yesterday at 2.47%, and early prices (8:00 am ET) of MBSs were up +16 bps from yesterday. Thought we would see some consolidation before another leg lower in rates but another round of weak economic data from Europe adds to the belief, as we have been hammering, that the global economic outlook is continuing to decline. On Wednesday the FOMC and Jerome Powell confirmed concerns with the policy statement, the Fed forecasts, and his press conference. The thing is, it appears economies are worse than what was believed, at least presently. The weakness in an already technical bullish environment encouraging more movement to safety in treasuries bringing down rates across the curve.

Germany's Manufacturing PMI (44.7) fell to its lowest level since 2012 in the flash reading for March. Data from France was also weak, as both Manufacturing PMI (49.8) and Services PMI (48.7) fell below 50.0, indicating contraction. The U.S. Dollar Index has built on yesterday's gain, climbing 0.2% to 96.69. Japan's March flash Manufacturing PMI remained at 48.9 (expected 49.2). Australia's March flash Manufacturing PMI fell to 52.0 from 52.9 while flash Services PMI contracted to 49.8 from 51.0. Continued demand for short-term Australian debt pressured Australia's 5-yr yield beneath the country's cash rate, which stands at 1.50%. Eurozone March flash Manufacturing PMI fell to 47.6 (expected 49.5) from 49.3 while flash Services PMI dipped to 52.7 from 52.8. Germany's March flash Manufacturing PMI fell to 44.7 (expected 48.0) from 47.6 while flash Services PMI fell to 54.9 (expected 54.8) from 55.3. France's March flash Manufacturing PMI fell to 49.8 (expected 51.4) from 51.5 while flash Services PMI fell to 48.7 (expected 50.6) from 50.2.

Adding to the new-found additional concerns in markets, Brexit is closing in on an end game and it doesn’t look good. The EU agreed to an extension for the exit that was due next Friday to April 12th.  Prime Minister Theresa May has an extra two weeks to get her unpopular deal approved or—more likely—set a new course. After plunging 1.5% during negotiations, the pound rose against the dollar Friday morning. Global investors seem to be taking a more careful look at the situation after a long period of lethargy. This is clear from correlations between sterling and U.K. stocks and spells opportunities.

Investors are hunting for yield, noting the ninth straight week of inflows to investment-grade bond funds, $6.6B this week - while high-yield bond funds drew in $3.2B and $1.2B went into emerging market debt. The market is struggling to digest a rapid about-turn from the U.S. Federal Reserve on interest rates as economic growth disappoints globally and fears of a deflationary environment return. Despite big gains for stocks  this year, positioning is decidedly negative with $66.8B outflows from equity funds year-to-date.

At 9:30 am ESTthe DJIA opened down -112 after increasing 217 yesterday…..increasing volatility. The NASDAQ opened down -31, and the S&P dropped -12. The 10-yr stood at 2.47%, down -7 bps from yesterday’s close.

At 10:00 am February existing home sales were expected to have increased from 4.94 mil in Jan to 5.10 mil; as reported sales increased from 11.8% to 5.51 mil; yr/yr, though sales were down -1.8% but up from yr/yr last month at -8.5%.

Although the rate markets are moving our way the last 3 sessions have increased volatility. Expect that to continue. Rates are falling, but maybe too quickly with the huge sea change at the Fed and the wake-up of investors that the economic outlook is worse than those brokerage firms want to admit.

Source: TBWS