Stocks were down much of the day before making a huge comeback heading into the close after Paul Krugman called for the recession to be over by September. Good luck with that call Paul! Sold to you!!!!
The way I see it: Today was the calm before the storm. The fireworks really begin on Wednesday and Thursday when the 10 and 30 year auctions are held respectively. The auction details will be announced at 1pm on both days. Make sure you catch Rick Santelli for the announcements. I expect them to be huge market movers one way or the other.
If the auctions go well we could see a big pump. If the tails are huge or god forbid we see a failed auction, I think an equity crash is possible.
There were some fireworks in the credit markets today but it had nothing to do with treasuries. MBS(mortgage backed securities) continued to totally collapse. The move today was stunning:
Here is the longer term trend on the FNMA 30 year coupon:
Basically what these charts tell you folks is mortgage rates are soaring. The FNMA is the 30 year coupon which is the benchmark from which mortgage rates are set. Like treasuries, the yield is inverse to the chart: The lower The FNMA drops , the higher the yield. Word on the street is rate sheets have had to be updated and increased 2-3 times a day in order to keep up with the collapsing MBS markets.
Moves like this have never been seen before! Not even back in Sept/Oct. when we were on the brink of a financial meltdown. If you look at the first chart above, we saw a -31/32 drop in the FNMA today which equates to almost a full basis point increase on mortgage rates in one day alone!
Mortgage rates by the end of the day at one outfit today were 5.875%.
This of course is BB's worse nightmare. The Fed in my view has completely lost control of the bond market. Mortgage rates are soaring despite the massive purchases of MBS's by the Fed. This trend will end up imploding the housing market and the bank's balance sheets if it continues. These moves in MBS are parabolic folks!
Remember, the Fed has promised to buy over $1 trillion dollars of MBS's versus the mere $300 billion that the Fed has allocated for buying treasuries via QE.
The bond market is basically giving Ben one giant middle finger at this point by selling off both. They are screaming: BRING IT ON BEN!
I can't wait to hear the next Fed statement scheduled for later this month. I am sure they are absolutely panicked by what is going on in the bond market. I think the boys in Chicago have had enough of Ben's bullshit.
The Fed is in a real tight spot right now. I personally don't see a way out. If the Fed decides to jump in with more buying of MBS's and treasuries, the bond market may tell Ben to go pound sand and continue to take yields higher. If this happens Ben's screwed and he knows it. If he does nothing and rates keep rising he is pretty much in the same predicament. I wouldn't want to be in his shoes!
The short end of the treasury yield curve also continued to move higher today. This flattening of the 2 year versus 10 year on the yield curve is huge negative for stocks. This puts a nice squeeze on the banker's profits because borrowing short and lending long becomes less profitable as the spreads flatten.
If the MBS action today is in any way indicative of how the bond market is feeling this week, we could be in deep trouble when the treasury auctions hit later this week.