The Bond market got a boost this morning after ADP reported that according to their research, there were 23,000 private sector jobs lost in March, well below the 40,000 they expected to be created. ADP cited that the jobs recovery is underway, but that businesses still remain somewhat hesitant to increase staff. This report is not necessarily an accurate gauge of the official Jobs Report, but does tell us that the labor market remains weak. The official Jobs Report will be released this Friday, and consensus estimates are for 190,000 jobs to be created…and remember, the official Jobs Report includes government jobs – and a boatload of temporary census jobs. This is not reflected in the ADP numbers. Tomorrow, we will talk more in detail on Friday’s Jobs Report as we lay out our strategy headed into the release.

The Fed’s Mortgage Backed Security purchase program comes to an end today. Late yesterday, Dallas Federal Reserve Bank President Richard “Loose Lips” Fisher said that “the Fed must sell back those Mortgage Bonds to the market, but it is not yet time to do so.” He went on to say that it is “unlikely that the Fed will have to step back into the market to buy MBS, even though home loan rates are rising.” Mr. Fisher is not a voting member of the Fed this year, but as we have been saying, there is growing sentiment amongst the voting members for the Fed to start trimming its balance sheet and selling Mortgage Bonds – this will push mortgage rates higher over time.

The Chicago Purchasing Managers Index (PMI) arrived at 58.8, lower than expected and also lower than the prior month’s read of 62.6. This added a little selling pressure to Stocks, and modestly improved Bonds.

Bonds remain in a trading range between the ceiling of resistance at the 200-day Moving Average, presently at $100.60, and a floor of support at $100.16. Friday’s Jobs Report may be the catalyst to knock prices out of this trading range. We will start the day by Floating as we watch Bonds very carefully…especially now that the Fed is no longer providing a safety net.

Bond prices have been volatile this morning, starting the day 9bp higher, dropping 41bp from that level, and now have slightly improved since. Get used to the volatility, as the Fed exits and therefore will not smooth things out and soften the decline as they’ve been able to do for the past fifteen months. The Fed has stated and underscored that the buying program will not continue, and in fact, they will gradually become a seller of MBS.

Potentially keeping Bonds within a range beneath the 200-day Moving Average and above support at $100.16 is Friday’s Jobs Report. Traders may not want to over-commit their position in advance of such an important number. Currently, formal estimates are for 190,000 job creations…but whisper numbers are creeping as high as 300,000 jobs created during March. We’ll get deeper into a Jobs Report Strategy later in the week.

Chicago Fed President Charles “Chuckwagon” Evans spoke today in Hong Kong, saying that he sees the Unemployment Rate remaining above 9% for the rest of the year, and therefore feels the Fed will keep their accommodative policy in place for an “extended period” of around six months. This does not mean that he agrees with keeping the much publicized “extended period” language in the Policy Statement for another six months – but that he does not see the Fed increasing rates during the next six months. This is in line with Fed Funds Futures forecasts.

News on the housing market via the Case/Shiller Home Price Index, showed that home prices in 20 major US cities appear to be stabilizing. While some markets are still struggling – particularly depending on the local job situation, as well as the inventory levels – this appears to be reasonably good news for housing on a national level. Remind your clients that great opportunities are at hand, with the combination of still low home loan rates, a wide variety of homes available at affordable prices, a tax credit still available for the next month…but this alignment of stars will not last.

Consumer Confidence came in at 52.5, higher than expectations and up from previous levels of 46.0. Not a big market mover – but did help support Stocks in keeping their positive gains made so far this morning.

For now, we will recommend a Cautiously Floating bias, as we watch the Bond trade between the aforementioned levels of support at $100.16 and resistance at the 200-day Moving Average, currently at $100.59.

Mortgage Bonds opened the day lower, but have since recovered from the worst levels after tame consumer inflation data was reported.

The Core Personal Consumption Expenditure (PCE) Index for February was 0.0%, lower than the 0.1% anticipated. This left the year-over-year Core PCE rate at a tame 1.3%, a downtick from January’s 1.4% year-over-year reading. Inflation remains subdued for the moment.

Consumer Spending rose for the fifth straight month to 0.3% in February, and in line with estimates. Personal Incomes were unchanged and also in line with expectations. The bump in spending with no increase in income naturally lowers the savings rate. The US Savings Rate moved down to 3.1%, and represented the lowest savings rate since October 2008.

Looking forward, this is going to be an exciting week. First, Wednesday marks the end of the Fed’s MBS buying program. Thursday will bring Initial Jobless Claims which has gotten much attention of late – and although there are no major Treasuries set for auction this week, Thursday also brings the announcement on the size of next week’s auctions, which include 10-Year TIPS, 3 and 10-Year Notes and 30 Year Bonds. As you are aware, problems in the Bond market last week were exacerbated by weaker demand for intermediate Treasuries, as investors are demanding higher yields for both the increased size of supply and concerns over the US level of debt. Then on Friday, we will receive the highly anticipated Jobs Report, which is always very volatile. But why is this Jobs Report different than all other Jobs Reports? Added volatility.

The Jobs Report will be released on Good Friday – and that means trading desks would already be thinly staffed. Adding to that is the full closure of the Stock market on Friday, which thins the herd even further. And finally – the Bond market will be open, but closing at Noon ET, which means that any business Traders want to do will have to happen early on during the shortened session. Anytime there is a lack of liquidity, prices are subject to exacerbated moves. As large orders for buys or sells come in, they are not as easily filled at each price point. Therefore – Traders need to jump to the next price level in order to fill the order. We will talk more about this as the week moves on, but get ready for a potentially volatile day on Friday.

Since Thursday’s Hammer pattern, Bond prices have improved. However, they have faced the challenge of the 200-day Moving Average as overhead resistance. For now, we will recommend a Floating bias as we carefully watch today’s trading activity.

Mortgage Bonds have traded in a wild 150bp range from Tuesday’s intraday high price to yesterday’s intraday low…and with the final days of the Fed’s Mortgage Backed Security buying program in close range – don’t expect the volatility to slow.

Make no mistake. The MBS buying program will end on March 31st. The Fed has confirmed this several times, including during yesterday’s testimony by Fed Chairman Ben Bernanke. As we’ve been discussing, the Fed will likely change teams entirely and become a seller of MBS. Once the Fed begins selling MBS, it’s obvious that this will pressure prices lower and push rates higher. Yesterday, Bernanke said that this would be a gradual process. As far as timing, he did not give any definitive clues – but he did say that he would like to remove the “quantitative easing”, and just have a more traditional Fed Funds Rate as the tool the Fed uses for monetary policy. Bernanke explained yesterday, that after bringing the Fed Funds Rate down to virtually zero, the Fed then had to resort to “quantitative easing” (as in the purchasing of MBS) to stimulate the economy further.

The final reading on Fourth Quarter Gross Domestic Product (GDP) came in at 5.6%, lower than the previous 5.9% reading – and we had anticipated that there would indeed be downward revisions coming to this number. The Advanced First Quarter GDP reading for 2010 will be released April 30th, but economists are already expecting a much slower pace of economic growth, somewhere between 2.5 and 3%. In other economic report headlines – Consumer Sentiment was reported at 73.6 – a little better than expectations.

The Bond is following through higher so far today – and we will start the day by carefully Floating.

On March 1st we wrote in the Daily Update, “Any school kid knows the old saying…that March comes in like a lion and goes out like a lamb. But since this is the last month of the Fed’s Mortgage Backed Security purchase program, interest rates in March could very well come in like a lamb, and go out like a lion.” And yesterday – the lion roared. With only a few more days of Fed MBS buying support remaining, Mortgage Bonds plunged lower, causing many lenders to issue multiple re-prices for the worse. This is a reminder to us and to our clients – that rates move up much more quickly than they move lower.

So far this morning, Mortgage Bonds are slightly lower so far – but keep your seat belt strapped tight, as another huge auction looms at 1pm ET. This offering is a $32B 7-Year Note auction, and the results could ignite more volatility. The auction results so far this week have been disappointing overall, with investors demanding increased yield for their risk. Should this trend continue today, we could see the entire Bond Market move lower still. And with less Fed buying to support Mortgage Bonds, the safety net we have been accustomed to for the past fifteen months is being stripped away. A little over a year ago, the yield on the 10-Year Treasury Note was around 2.2% – and it has now moved up to 3.85%. Mortgage rates have hardly increased at all – which is obviously due to the enormous Fed buying. The training wheels are about to come off, and we’ll see how Mortgage Bonds do on their own soon enough.

In this morning’s economic report headlines, Initial Jobless Claims were reported at 442,000, lower than expectations of 450,000, and representing the lowest reading in 6 weeks. Continuing Claims fell 54,000 to 4.65M, while the number of people collecting EUC (Emergency Unemployment Compensation) benefits fell by 345,800 to 5.7M. Overall, the recent trend of claims and today’s number does show some modest improvement and is somewhat encouraging. The markets are already starting to look ahead to next Friday’s Jobs Report, where it is expected that 200,000 jobs will be created. This number will likely be somewhat skewed by improved weather and census hiring – so digging into the details behind the headline should prove to be interesting.

Stocks are higher on news that Germany will back a financial aid package to Greece, thereby erasing some of the concerns in the Eurozone. Additionally, the European Central Bank announced they will extend emergency collateral rules through 2011. This will help debt-ridden Greece further by allowing them to still use their downgraded debt (BBB+ rating) as borrowing collateral with the ECB.

Prices will likely continue to drift lower, and may even test this support later today when the Treasury releases the 7-Year auction results. A continued Locking bias is likely prudent.

Notice to North Carolina and South Carolina mortgage borrowers. Watch your rates on FHA, VA, USDA and conventional mortgages. The combination of foreign government bond downgrades, large Treasury auctions and the end of the FED MBS purchase program means rates have headed up and will remain volatile. So, NC and SC borrowers should be locking or watching the markets carefully.

Mortgage Bonds are trading lower, but improved from their worst levels. Bonds began the day under selling pressure after a credit downgrade in Portugal ignited more concerns about sovereign debt in the wake of the recent problems in Greece. This sent Bonds around the globe lower, as the theory that “there’s never just one cockroach” appears to be playing out.

We have been talking of late about how credit rating agencies Moody’s and Fitch have had their eye on AAA rated countries – including the US – and how downgrades were likely. This morning, Fitch Ratings pulled the trigger and downgraded the sovereign debt of Portugal from AAA to AA-, citing concerns over the government’s ability to service its debt. This news had a negative ripple effect on debt markets around the globe, including here in the US, as we are also on Fitch’s “watchlist”, along with the UK, France, and Germany.

And if you look at Fitch’s major concern – “the government’s ability to service its own debt”, there are likely more shoes to drop, since many countries around the globe face the same challenges – including us. Should the US take a hit to our credit rating, the cost of our borrowing will increase – much like a mortgage client who may not have perfect credit.

Speaking of our debt…at 1:00pm ET, the Treasury will announce the results from today’s enormous $42B 5-Year Note auction. Yesterday’s $42B of 2-Year Notes didn’t have a good showing, and so far today the 5-Year Note yield is at 2 month highs, suggesting that investors will demand a little more yield to buy our US debt.

And all of this negative pressure on the Bond market comes at a time when the Fed is on the exit ramp with their MBS purchase program. With just 6 days remaining of the 15 month program, the Fed will be going from buying consistently every week, to buying nothing by next week…so there will no longer be any Fed support to help Bond prices. In fact, what we are seeing is growing sentiment amongst the Fed to trim their enormous balance sheet by becoming a seller of their Mortgage Bond holdings, which would certainly lead to an increase in rates.

In economic report news, Durable Goods Orders were essentially in line with expectations at 0.5%, representing the 3rd straight monthly increase. When stripping out autos, durable goods rose 0.9%, above the 0.6% expected. This news added more selling pressure to Bonds.

However – very weak New Home Sales data hit the wires, and helped Bonds recover some of their losses. Sales of new homes in the US fell slightly in February – the fourth straight monthly drop – to yet another record low. New home Sales slipped 2.2% to an annual pace of 308,000, which is the lowest rate since the government began tracking the data in 1963. As a result of the slower sales pace, supply levels of New Homes climbed to 9.2 months, up from the prior reading of 8.9 months. Perhaps some of the weakness in the New Home Sales arena is due to the tax credit expiration on the horizon. Buyers may be thinking that a new home purchase may not close in time to take advantage of the credit. This makes an existing home more attractive by comparison for the time being, when factoring in the tax credit…another example of unintended consequences.

Bond prices have improved from their worst levels after dipping down near support at the 200-day Moving Average. This morning’s Portugal story may continue to reverberate, and with the US having two more big auctions today and tomorrow – a bias towards Locking seems prudent at this time.

Existing Home Sales for February were reported at 5.02M units, in line with expectations. Of concern was the inventory number, which at the current pace of sales swelled to a 8.6 month level, up sharply from the 7.8 month reading in January, and the highest inventory level since last August’s 9.2 month reading. The government’s First Time Home Buyer Tax Credit was effective for spurring sales last year, but as we expected, it was at the expense of 2010 sales. With the tax credit ending soon, we may see a pick up in March and April numbers as the program comes to a close. The real fix for housing will depend on a stronger labor market.

Hearings begin today on the potential reshaping of the mortgage market, in particular the fate of Fannie Mae and Freddie Mac. Treasury Secretary Timothy Geithner is in the hot seat in front of the House of Representatives Financial Services Committee. Mr. Geithner is defending the Administration’s actions of taking control of both Freddie Mac and Fannie Mae 18 months ago, which included injecting $127B of capital into the companies. In his prepared speech, he will say it was “unfortunate and undesirable” to do so, but it avoided a “much more wrenching decline in housing prices”.

Republicans are calling to have the housing finance system privatized, where private capital would be the primary source of mortgage financing. This would also include winding down both Fannie Mae and Freddie Mac over a 4 to 5 year period. At the present time, Fannie and Freddie, along with the FHA, back over 90% of all home loans and at this time, the government has given these bodies a blank check book to support the housing market. However, the government tends to run things inefficiently with a lot of overspending. So…looking for a solution that would include the private sector and encourage competition may be a good thing for housing in the long run.

At 1:00pm ET, the Treasury will announce the results from a whopping $44B 2-Year T Note auction. Recent auctions have shown good buying interest, helping Mortgage Bonds to remain near current levels.

Mortgage Bonds are trading lower on fears about the Fed’s future direction and ability to fight the threat of pending inflation. It appears that Obama will be tapping San Francisco Fed President Janet “I Love Inflation” Yellen to take over the Vice Chairman of the Fed position, soon to be vacated by Donald “Ice Cream” Kohn. Kohn was already considered to be an inflation “dove”, favoring low rates and spending as opposed to an inflation “hawk”, who is more vigilant and on guard against inflation. But Yellen has been an extreme dove, championing near-zero interest rates and a massive expansion of the Fed’s balance sheet…even in the face of warnings from many regional Fed officials who advocate pulling back monetary stimulus more quickly, on the concern of future inflation. Bond Traders didn’t like the appointment, as the prospects for higher inflation will rob Bonds of their value over time, since the return of a Bond is a fixed payment.

And it isn’t just Fed officials who have been warning against inflation. Although Ben Bernanke continues to pitch low inflation, investors around the globe are having increased doubts. Massive debt plus massive balance sheet expansion, combined with near zero interest rates for a long period of time, will no doubt conjure a recipe for inflation. The key is that once inflation rears its ugly head…will the Fed have the courage and the will to kill the monster by tightening policy, amidst enormous political pressure not to do so? The appointment of Yellen as Vice Chair makes that important job a lot more difficult.

When will we see the first signs of inflation? We have written to you in the past about the Velocity of Money. As business conditions improve and confidence increases, individuals have a tendency to spend more freely. So, profits earned by one business person are re-spent in another business on other goods and services…and so the chain begins and continues. The same dollar being spent over and over is the Velocity of Money. When the Velocity of Money increases in both speed and duration, it is often accompanied by inflation.

Some good news out of the retail sector, as the latest Retail Sales Report came in better than estimates. Despite stormy weather in many parts of the country, Retail Sales for February rose 0.3%, well ahead of the -0.2% expected. When stripping out autos, the number rose 0.8%, much better than expectations of 0.1%. This is a good report, but keep in mind it will be subject to future revisions like we saw in today’s report, which revised last month’s decent 0.5% reading sharply lower to just 0.1%. As economic conditions improve, we will see Retail Sales pick up. But remember, a pick-up in Retail Sales will influence the Velocity of Money.

Consumer Sentiment came in at 72.5, below expectations of 73.8. This was a disappointing number, which brought both Bonds and Stocks back towards unchanged levels.

Hints of inflation being on the rise in China have applied pressure on Bonds around the globe. This morning, China reported that their consumer prices rose 2.7% year-over-year, hotter than the 2.5% rise expected. The country aims to keep inflation below 3%, which is already higher than the 2% benchmark the US and many other countries around the globe target. China will need to take measures to curb inflation, which will include monetary policy tightening. And assuming rate hikes are part of their monetary tightening, their currency, the Yuan, should rise as a result. One way to allow their currency to rise against the Dollar would be for China to purchase a little less of our Bonds. The economic world is very interconnected, and this is why this story bears watching.

Yesterday we talked about the parade of Fed members who see inflation as a concern here in the US, and on today’s news out of China, the Federal Funds Futures are now pricing in a 80% probability of the Fed raising the benchmark Fed Funds Rate to 0.5% at the November FOMC meeting. The next Fed Meeting is March 16th and the statement released will garner intense scrutiny, as markets watch for the “extended period of time” language to be modified at some point. All this will have a major impact on the carry trade – for more information on the carry trade and what you need to know and communicate, listen to the most recent conference call on this topic, found in the “New Releases” section of the home page.

In today’s economic report news, Initial Jobless Claims were reported at 462,000, just above the 460,000 that were expected. Continuing Claims rose 37,000 to 4.6M, and the states reported 5.6M persons claiming EUC (Emergency Unemployment Compensation) benefits. This report shows no improvement in the labor situation.

At 1:00pm ET the results from the $13B 30-Year Bond offering will be released. The auctions this week have gone over fairly well with reasonably good demand, but it hasn’t yet been enough to push Mortgage Bond prices higher.

Mortgage Bonds are trading off their worst levels, and are presently battling to regain their ground above support at the 25 and 100-day Moving Averages. For now, we will continue to keep our bias towards Locking.