January 29, 2013Daily Rates & Viewpoints From the Officers & Staff of TIB.

Is the Bond Bubble Breaking?

Interest rates must be on the rise as the 10 year treasury reaches 2%.

A buoyant stock market, which is typically found to be in good times and various economic indicators, somewhat more positive, was enough to bring the bond bears out of hibernation and  produce a selloff in treasuries and pushing the 10 year treasury to a level we have not seen since April of last year.  Yes, there has been some good news, but it should come as no surprise as the Fed prepares to start a two day meeting today.   Minutes of the December meeting indicated some of the members of the FOMC began debating an end to the bond buying , known as quantitative easing, as early as this year.
 
So, yes, people seem to be more negative on the market the last few weeks thinking that something will come out of this FOMC meeting and will put an end to quantitative easing soon -  and that we are going to see higher rates. To add fuel to this negative attitude was the announcement The Conference Board’s index of consumer sentiment fell to a 58.6 this month from 66.7 in December, durable goods orders rose 4.6% in December after a 0.7 gain the previous month .  This comes on the heels of the unemployment claims dropping to 330,000 after dropping 37,00 the week prior, to a low that we have not seen since January of 2008.
 
Yes, we have had a decent sell off and had the 10 year rebound off this major support level of 2% to where it is currently trading at 1.95%, as investors are finding a little value at current levels.  As for the Fed,  they plan on buying as much as $3.5 billion of treasuries today with maturities from February 2020 to November 2022 and will purchase $85 billion in total this month of treasuries and mortgage backed securities.  According to 44 economists, Mr. Bernanke will push on with his purchases to the tune of $85 billion a month for a total of $1.4 trillion for this program that will end in the first quarter of 2014.
 
Yes, we have seen some stability, and we are getting better, because we are not getting any worse  theory, but this economy is still a far cry from being out of the woods. We still have the same issues we had last year. Unemployment is still very high, a number of regional economies around the country are still very ragged, a national debt that still registers in excess of $17 trillion and a fiscal cliff that has yet to be fully decided.  We also still have foreign economies that are in disarray and have an impact on our economy. For that matter, China and Japan have  both started buying treasuries again.
 
Yes, we have had a selloff - nothing more, nothing less. The bond bubble has not broken.  Given all the uncertainties that we still have, there will be more volatility in our treasury market than we saw in 2012, but that is to be expected with all the political and regulatory changes that will be swirling around and will be for the next number of months.


Todd Wentz Todd Wentz
Sr. Vice President of TIB Capital Markets
twentz@mybankersbank.com

Market Levels @ 7:16 AM CST

TIB Fed Funds & MMDA Rates - Previous Day
Agent 0.20% Prin 0.05% MMDA 0.30%
STAR Prin 0.10% STAR MMDA 0.35%
Key Indices/Commodities
1 - Month LIBOR 0.20% Dow Jones 13881.93
3 - Month LIBOR 0.30% NASDAQ 100 3154.29
1-Yr LIBOR 0.79% S&P 500 1493.00
1-Yr CMT 0.16% Spot Gold 1664.00
Prime 3.25% Spot Silver 31.09
3-yr LIBOR Swap/Offer 0.56% Spot Crude Oil 96.56
5-yr LIBOR Swap/Offer 1.00% CRB Index 300.27
3 Mo - Fed Fund Futures 0.13% 6 Mo - Fed Fund Futures 0.14%
US Treasury Yields US Non-Callable Agency Yields
Yield Maturity Yield Spread
0.00% 90 - Days    
0.00% 180 - Days    
0.22% 2 - Year 0.30% 8bp
0.37% 3 - Year 0.42% 5bp
0.82% 5 - Year 1.00% 18bp
1.92% 10 - Year 2.14% 22bp
3.10% 30 - Year    
170 BPs Yield Curve(2's-10's)
Sample 1x Callable Agency Issues
Description Call Date YTC YTM
FHLB 1.05 02/27/18 8/13 1.08% 1.08%
Select MBS Levels
Description Coupon Yield Spread/Duration*
15-Yr FNMA 3.00% 1.43% 87 / 3.44
30-Yr GNMA 3.50% 2.2% 85 / 5.99
*Duration @ 12 month Historical CPR
Morning Commentary: Blake Scharlach

We had two pieces of economic data this morning – and neither was particularly encouraging.  First, the Case/Shiller Home Price Index came in at 145.82 for November, which was a slight drop from last month’s 146.08 original number.  Year-over-year, we’re still up 5.52%, and that’s nothing to sneeze at, but it may be an indicator that HPI increases are slowing/stalling.   The number is being spun as “it’s the biggest year-over-year increase in six years”, but on a micro level, it’s a reduction in momentum.  Secondly, the Conference Board Consumer Confidence Index (the most important of the consumer confidence numbers), slipped from 66.7 in December to 58.6 in January, which is the lowest level since November 2011.  Higher payroll taxes were viewed as the primary reason for the drop-off.  On days like this, it’s not uncommon for the markets to read this data different ways.  The equities market is reacting positively – the Dow is up 35 in the first hour and a half of trading, but the bond market is fairly flat.  The 10 year yield is hanging tight at 1.96% after touching the 2% level briefly yesterday for the first time since April 2012.

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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