Thursday Bond Market Recap

By Rom Badilla

Following the aftermath of Ben Bernanke’s testimony to Congress Wednesday, stocks soared on better earnings prospects while U.S. Treasuries bounced from Wednesday’s highs. On the economic data front, home sales came in better than expected and people filing for first-time employment benefits increased.

Economic Data

Sales for previously owned homes declined 5.1 percent to an annualized number of 5.37 million homes in June, the second monthly decline after the expiration of the federal tax incentive for homebuyers. Despite the drop, the market was surprised as economists were expecting a more drastic fall of 9.9 percent. The miss can be attributed to the 30 percent fall in the Pending Home Sales Index in May which in turn led to the June negative expectations for Existing Home Sales. BNP Paribas’ economics team provided some color in a morning email to clients.

The decline was less than the markets and us were expecting based on the pending home sales index, which plunged by 30% in May. Today’s number was likely higher than expected due mortgage processing delays in April and May. The Homebuyer Assistance and Improvement Act of 2010, signed by President Obama on 2 July, recognized that an estimated 180,000 prospective new homeowners were not able to meet the 30 June closing deadline for the tax credit that expired in April. The new legislation extended the closing deadline from 30 June to 30 September for eligible homebuyers. The law thus provides any homebuyer who entered into a contract on a home by 30 April but was unable to go to closing within the required 60 days, an additional 90 days to close and qualify for the credit. As such, while the new law will likely smooth the projected path of declines in existing home sales, it will not help revive the demand for housing. It is clear that much of the stabilization in housing demand over the past year was a pulling forward of demand through low rates and the tax credit.

People filing for first time unemployment benefits jumped to 464k people for the week ending July 17. Though, Initial Jobless Claims for the prior week was revised slightly downward by two thousand to 427k. This week’s reading comes in worse than forecasts as economists expected a claims number of 445k. This brings the four-week moving average to 456k, a slight tick up from 455 in the prior week.

The four week moving average has been hovering between 450k and 500k since last November, which is more in-line with further job losses based off of previous cycles. Along those same lines, a moving average of below 400k is more in line with a recovery.

Continuing Claims for the week ending July 10 dropped to 4487k from a revised weekly reading of 4710k. The decline was better than forecasts as economists expected Continuing Claims to come in at 4590k. However, keep in mind that the drop doesn’t necessarily mean a pickup in hiring due to the fact that benefits for many of the unemployed expired in recent weeks. The unemployment benefits bill passed today will slow that process to some degree, since there are still massive amounts of people who continue to have difficulty in securing a job and are reaching the maximum 99 weeks of benefits.

The Conference Board released its June Index of Leading Economic Indicators (LEI). The index dropped 0.2 percent which was better than surveys of a decline of 0.3 percent. The previous month’s reading was revised upward by a tenth of a percent for a final increase of 0.5 percent.

Interest Rates

U.S. Treasuries sold off after bouncing from Wednesday’s highs spurred by Federal Reserve President, Ben Bernanke’s statement that the economic outlook “remains unusually uncertain.” The yield curve rose in a bear steeper trade, led by the long-end of the maturity spectrum. The Long Bond underperformed the most as the yield climbed higher by 6 basis points to 3.95 percent. The 10-Year increased 5 basis points to a yield of 2.93 percent. The 5-Year rose 3 basis points to 1.67 percent while the 2-Year crawled its way higher by a basis point to 0.56 percent.

10-Year U.S. Treasury Yields - Intraday Chart