Rational market behavior is not the theme for today.

  • Economic data was downright nasty, yet bonds and mortgage backs are both in the red. 
  • Weekly Unemployment Claims hit the tape up 3K to 588K while Continuing Claims rose to record highs.
  • Durable Goods orders were no better, falling 2.6% and excluding transportation, dropped 3.6%. We need to go back to 2002 to match that print.

Part of the atypical trade can be blamed on the following:

  • 30 billion of 5-year notes coming to market, 
  • Leveraged accounts selling into the long end of the treasury curve, 
  • Mortgage originator/servicer selling into month-end production. 

Others seem to still be crabby about yesterday’s FOMC statement not going far enough to help the credit markets. Call it the “Feds Balk, Market Walks.”

With no pre-commitment to buy treasuries, traders do what traders do. Sell. Unfortunately, they are taking mortgage backs right along with them. Currently, the 10-year note is down 27/32’s (yield 2.75%), mortgage backs down a smooth ½ point, and stocks off 178 points on the Dow. Technically, we’re just testing the bottom of the range with the market needing to make a stand right here (2.75% to 2.80%).

Given the sour economic backdrop, we would expect the market to hold and make a comeback into next week. If we are wrong, the pain will be another point to the downside for the 10-year note (channel bottom) and at least ½ point of additional punishment on mortgage pricing.