Mortgage Rates--



Treasuries and mortgage markets opened slightly better this morning ahead of two reports at 10:00. Stock indexes started a little soft. At 8:00 the 10 yr +4/32 at 2.20% -1 bp and 30 yr MBSs +3/32 (.09 bp). Friday interest rates increased slightly on end of quarter adjustments and a jump in consumer confidence; Feb personal spending also exceeded forecasts up 0.8%.

Bloomberg News in a recent survey of primary dealers concluded the yield on the benchmark 10-year note will finish 2012 at 2.48%, two weeks ago the 10 shot to 2.40% but quickly retreated and now is finding some minor demand at 2.20%. That’s the same as a January poll, suggesting the market isn’t ready to declare a bear market in bonds after a 30-year bull run. The optimism that rates won’t increase much is based on the expiration of the $1T Bush tax cuts expiring at the end of the year and continued high fuel costs that will sap consumer spending and stymy economic growth. Also in play, Bernanke has in the past said the Fed would do another QE if the economy rolled over.

Primary dealer holdings of U.S. government debt rose to $91B last month, from a net bet against the securities of $53.4B last May, according to the Fed. In the survey, 14 say the odds are that the Fed will need a third round of bond purchases, or quantitative easing, to bolster the economy. Yield forecasts at the primary dealers range from 2.0% at RBS, Scotia Capital and Barclays Capital to 3.0% at Deutsche Bank AG, Jefferies & Co. and BMO Financial. Even if the most bearish forecasts prove true, yields would remain below the average of 3.85% over the past decade, 4.98% over the past 20 years and 6.48% since 1982. Primary dealers’ track record of longer term forecasts isn’t any better than most other forecasts; the dealers at the moment are betting on an economic decline in the second half of this year. Nevertheless in the moment its worth considering. We have contended interest rates will not increase much this year, but at the same time we don’t expect rates to decline a lot from present levels.

At 9:30 the DJIA opened -11, the 10 yr note +9/32 at 2.18% -3 bp and 30 yr mortgage pricers8/32 (.25 bp).

At 10:00 Feb construction spending was expected up 0.5%, spending declined 1.1% and Jan was revised lower to -0.8% frm 0.1%; the decline was the biggest monthly drop since July 2011. The March ISM manufacturing index was expected at 53.0, as reported 53.4 frm 52.4 in Feb: new orders component 54.5 frm 54.9. employment index at 56.1 frm 53.2 and prices pd at 61.0 frm 61.5. The better than expected ISM data took the stock indexes off their lows and treasuries and mortgages backed off their best gains prior to the report.

The rest of the day will be watching the stock indexes, after a better ISM report the indexes are moving back to unchanged levels after the DJIA was down over 50 points prior to the report. The 10 yr note still holding a gain but is faltering momentarily at 2.15%.