Ok so the bond markets are down today. I was just thinking this morning that in the old days of a few weeks ago if the bond/mortgage markets were up or shall I even say down 8/32 or .25pt it is really no big deal. After all markets go up and they go down. It is as much part of life as another losing season for the Mets.

However, I got this strange feeling this morning because my brain for some unforgiving reason is heartbroken over the fact that the bond/mortgage market is actually down 8/32 or .25pt. How dare it!! Well this is what has come of the bond/mortgage markets for us pathetic souls that look at this crap every day. I actually started to think this market could and would never go down so when we now have what is really just a modest sell-off I think the world is coming to an end. So let’s all help each other accept this harsh reality and understand that even with the markets bucking the recent trend we are still at a sexy 1.48% 10yr and mortgage prices are still as high as Snoop Dogg. All-in-all life is still pretty good.

So why the pause in the bond rally? Take a guess…yes the EU. The ECB’s Mario Draghi (what a great name for a race car driver) pledged yesterday that the ECB will do whatever was necessary to protect the EU from collapse which includes what we mentioned the other day which is “fighting” the unreasonable high Gov’t borrowing cost. So yes this obvious stance by a pivotal member of the EU hierarchy has caused the world to feel a little better about the EU crisis.

Given the limited comments by such EU officials I get why investors are psyched but I am skeptical that this is a easy as publically stating the obvious. This just goes to show how information starved this market is and how much investors want to put the EU in their rearview mirror. I do believe the euphoria will wear off but in the meantime this comment is just what the stock markets needed as investors went out of the flight-to-quality trade of buying US Treasuries and reinvested in the riskier assets of stocks. This is known also as risk-on/risk-off. Another one of those obnoxious Wall Street terms.

Interesting Stat of the Day: The Jobless rate in Spain is the lowest since they returned to a democratic nation back in the mid-70’s. The current jobless rate is 24.6%. So I guess Obama can reference that the next time he tries to put a silver-lining on our 8.2% unemployment rate.

We are taking a small break from the historic bond market rally this morning as US Treasuries are down marginally from yesterday’s close with the 10yr sitting comfortably at 1.40%. We touched on 1.38% yesterday so I guess we are just taking a little breather from what has been a massive flight-to-quality trade into US Treasuries. The reasons being for what we have been talking about for what seems like forever which is the global economic slowdown as a result of the EU crisis (I saw an article this morning about the deepening of the recession in Britain) and the increased likelihood of additional Fed stimulus in the form of QE3. What the Fed is going to do is up for debate but expect more long-term US Treasury buying and asset purchases in the form of mortgages.

There is also some talk of doing something in the ever growing student loan debt markets. This, in my opinion, is a major issue that has been overshadowed by the housing crisis. College grads that are burdened with student loans that could be as high as $200k after 4yrs of private school but can not afford to pay for these loans because they can not find a job. Those of us who have kids in college know what I am talking about. The problem here goes beyond the obvious. While homeowners have had a chance to refinance their debt at lower rates, this same luxury is not available to these students because the student loan markets are not as efficient as the mortgage market.

Think about this… there is about $150 billion of private student loans and the average rate on new student loans during the past 3 years was 8% to 10% (and the CFPB is worried about deceit in the mortgage market!!). If you do not think this debt burden does not put a strain on the housing markets because it is pretty much eliminating a whole new generation of homeowners then you are crazier than The Situation!! And this does not even get into the parents of these poor souls that feel the need to help their children with this 800lb gorilla. So it would be great to see a scenario where these students who were just trying to get a quality education be given the opportunity to refinance this debt at a rate at least close to what equity strapping homeowners have done as well as our over spending Gov’t. Makes sense…right.

We did get some good news regarding US home prices. The Federal Housing Finance Agency announced yesterday that home prices in May were up .8%. This follows the April number which show a .7% increase. It might not seem like a lot but it beats the hell out of prices dropping and keep in mind that prior to the cowboy days of 2002-2006 home prices generally went up about 5% on a yearly basis. Also the FHFA reported a 3.7% increase year to year. We are still down 17% from the 4/07 peak but it does appear that the worst is behind us at least for now. According to Zillow the housing market hit its bottom in early 2012. Let’s just hope that the crisis in Europe does not reverse this positive momentum.

Last but not least (did I lose you yet??) we got the release of the Weekly MBA Applications Survey. As expected the rates were at all-time lows. Here are the highlights:

• Index is up .9%
• Refinance Index is up 2%
• Purchase Index is down 3%
• The refinance % was 81%
• The average convention 30yr rate was 3.74% w/.43pts
• The average FHA 30yr rate was 3.52% w/.52pts
• The average 15yr rate was 3.07% w/.45pts
• The average 5/1 ARM was 2.68% w/.35pts

(Image courtesy of PressTV.ir)

What a difference a few weeks makes! For those of us that are sports fans, a few years ago the great Stephon Marbury said of the Knick situation during another dreadful season that “The ship be sinking”. He was actually the second NY athlete to say that. A guy named Michael Ray Richardson did it in the 80’s (just want to keep my historic and totally useless spots facts accurate). This is what came to my mind first thing this morning when I got into my office and turned everything on. Just to try this morning on for size, how about these headlines to pretty much sum everything up:

• Spain slump deepens as bailout fears grow;
• Great uncertainty hangs over German economy;
• Greece now in “Great Depression”.

And here we all thought the Mets and Yankees had a bad weekend!! The ship is sinking or so it appears as the situation in the EU has obviously not improved since we last talked and has now reached the point of calamity. Many smart people out there have always pointed to Spain as being the linchpin to the future of the Euro. With their situation getting worse and with the markets just compounding the problem by selling all things Spain, with the exception of their favorite Barcelona soccer jersey, it does almost feel as if it is inevitable for the total collapse of the Spanish economy and ultimately the EU.

Unfortunately we have seen these types of events before in a smaller but yet meaningful scale with the collapse of Bear, Lehman, FNMA/FHLMC, Countrywide and some others less significant. Things were obviously bad in all those cases but once the market decides that your done then any hope at reviving what little good is left vanishes quickly. You get the feeling the same could and will happen with Spain but unlike the pre-mentioned situations there is no Fed bailout (FNMA/FHLMC) or there is no company that will bottom-feed to pick up the dead carcass like Chase did with Bear or BofA did for Countrywide (which they will eternally regret). We are talking about the economic collapse of a country with about 50 million people that had a first class banking system. In all due respect to Greece…this is not Greece. Then when you couple this with the “Germany economic uncertainty” headline, it is time to hide under the table. We are in for a rocky road ahead.

All this is unprecedented and the financial markets are acting that way which is why the flight-to-quality trade is in full tilt in-spite of insanely low historic yields in the US Treasury markets as well as the mortgage markets. The 10yr is now down to 1.41% and it is hard to make a strong argument that it can’t go lower especially when the expectation of QE3 is at its all-time high. I am not ready to declare a 1.0% 10yr just yet but it is on the tip of my tongue. Keep in mind that I do believe these low yields are insane and when the bubble bursts it will get ugly. However, I just do not see a return north on bond yields in the immediate future. To help matters along this morning in keeping yields low, we have the stock market getting crushed. Most indexes are down as much as 2.0%. Even oil is getting hit after what has been a quick return to higher oil prices (it doesn’t take them too long to get to the pump when that price goes up…funny) as it is down about 4.0%.

So much for a ho-hum summer complements of our friends overseas. London will have a hard time producing anything in the 2012 Summer Games that is getting more attention than what the EU is giving us.

There was a lot expected of this week and it turns out that the build-up was far more exciting than the results. As mentioned on Wednesday afternoon, the Fed announcement and subsequent press conference did very little to provide traders with any new insight into future Fed action.

One thing that the Fed did do was make it clear to not expect anything definitive from them. They are doing just what everyone else should be doing which is look to the economic data to determine the future of interest rates. However, the game here is to see what the Fed will be doing regarding their open market operations so traders can front run the Fed. That is what bond trading is about now-a-days as opposed to trading based upon fundamental or technical philosophies.

So where do we go from here? In my opinion not very far in either direction until the NFP number next Friday. We are currently sitting at a 1.95% on the 10yr and I give the range a +/- 8bps from here. Of course there could always be some headline news out of Europe that could rattle the cage but those headlines have been pretty quiet. When something has happened over there like the recent downgrade of Spain, it was met with little reaction. So all eyes will be on next week’s report to see if there is any follow-thru from the last poor report. If it is another weak number then I could see us having a nice rally that might not test the 1.71% low on the 10yr but I could see 1.80% pretty easily.

However, if we get a strong number then we could see getting right back to about 2.25% which is where we were before the last number. Now I believe the best scenario would be a number that is non-eventful and in-line with the consensus which should keep things status quo. I like this more for many reasons one of which is that it just continues the low rate sentiment in the market without any disruptions in the trading range.

Well the day is finally here for what I know the markets have been looking to ever since the weak NFP back on 4/6. That is the Federal Reserve Open Market Committee (FOMC) statement on Fed monetary policy. The calendar looks like this:

• 12:30- Release of the FOMC statement
• 2:00- Release of the FOMC Summary of Economic Projections
• 2:15- Fed Chairman Bernanke’s press conference

So we will have a wave of newsflashes that have the potential to significantly move the markets. Wall Street economists will be dissecting every letter, word and sentence of the statement like an invasive mother-in-law. The Fed has been sending mixed signals over the last few months so this is their chance to set the record straight and provide a clear understanding of where they stand on monetary policy. One point that the markets will be looking to is that their view of the state of the economy is consistent with their end of 2014 stance on keeping rates unchanged. There has been a disconnect between what they have been saying regarding the strength of the economy vs. the justification in keeping rates at current low levels all the way thru the end of 2014.

Since the strong close on Monday the bond markets have cooled down a bit leading up to today’s announcement. The 10yr closed @ 1.93% on Monday but we have grinded lower since with it currently sitting at 2.00%. Considering that it closed @ 2.05% on 4/6 after the weak NFP number, we should be pleased that we not only sustained the lower yields but were able to go even lower. Remember we were @ 2.23% seconds before the release of the NFP number.

As those who read this consistently know Wednesday is also the release of the MBA Weekly Application Survey. I am pleased to say that FFF outperformed the survey because the index showed that applications were down but our submissions were up. Anyway here are the highlights:

• Applications decreased 3.8%
• Refinance Index was down 5.6%
• Purchase Index was up 2.7%
• Within the Refinance Index conventional refi’s were down 6.1% and FHA refi’s were down 2.1%
• Within the Refinance Index 58.8% were fixed-rate 30yr, 23.1% for 15-year fixed , 5.2% for ARM’s and 12.8% other (10yr, 20yr, 25yr or 40yr)
• The refinance share decreased to 73.4%
• The average 30yr conventional rate was 3.81% w/.40pts
• The average 30yr FHA rate was 3.81% w/.52pts
• The average 15yr rate was 3.32% w/.41pts
• The average 5/1 ARM rate was 2.81% w/.37pts

(Image courtesy of MarketWatch)