Bond Report: Monday, September 25

The National Association of Realtors has released its survey number for this quarter today. As expected, it shows a weakened housing market. This has a negative effect on the open markets, driving bond prices UP, yields DOWN - a good cycle for mortgage interest rates.

Bottom line here: there is a 33% chance now that the FED will actually have to LOWER their fed rate before the end of the year to inject stability into an inflationary and stagnant-growth economy. This will bring lower mortgage rates because investors will flock to the bond market seeking stability - prices up=yields down=lower mortgage interest rates.

My Notes here are in red:

NEW YORK (MarketWatch) -- Treasury prices rallied Monday, keeping the benchmark yield at its weakest level in almost seven months, after news that median sales prices of existing homes dropped for the first time in 11 years, providing yet another indication of the housing market's deterioration. (As I mentioned in the previous post, housing is an "economic factor" that impacts the bond market.)

The rally was not dented by some fairly harsh comments on inflation (another factor) from Dallas Fed President Richard Fisher. The 10-year Treasury note last was up 9/32 at 102-16/32 with a yield of 4.559%, its lowest level since Feb 28. Prices and yields move in opposite directions. (This says that interest rates are at their lowest points since February)

The 30-year long bond rose 17/32 to 96-25/32 with a yield of 4.702%.

The 2-year note last was up 1/32 at 100-13/32 with a 4.655% yield as the 5-year note rose 3/32 at 100-153/32, yielding 4.521%.

The Treasury market this month mostly has rallied due to expectations that a weakening economy, particularly the housing sector, will force the Federal Reserve to end its rate-tightening cycle.

The August existing-home sales report provided more grist for this argument. The National Association of Realtors group said the August decline in housing prices from year-earlier levels was only the sixth such fall in the past 30 years. The median price of an existing home fell 1.7% year-over-year to $225,000. The drop was the second largest decline in the history of the realtors' survey, exceeded only by a 2.1% drop in November 1990.

However, the number of sales exceeded analysts' expectations. Sales fell 0.5% in August to a seasonally adjusted annual rate of 6.30 million. Analysts polled by MarketWatch had projected just 6.18 million sales.

Inventories of unsold homes rose to 3.92 million, a 7.5-month supply at the August sales pace, the most since April 1993. "While the existing home sales number didn't fall as much as the survey expected, it confirms a weak trend that fixed income investors have been using to add to their long positions," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

"Housing is undergoing a correction in the early third quarter that is similar to the drop-back around February, but with little pass-through -- at least thus far -- to the rest of the economy," said Action Economics. The odds of an interest rate cut by the end of the year increased after the data came out. The fed funds futures contracts last priced in a 33% chance of a rate cut by year end, up from 13% on Friday.

The Dallas Fed's Fisher, speaking at the Banco de Mexico at a conference about the conditions of the U.S. and Mexican economies, said higher inflation remains a bigger risk for the economy than a sharp slowdown of growth. (This drives people OUT of the open market and INTO the bond market, seeking better stability - prices up/yields down=rates down) "I continue to fret more about inflation than I do about growth," Fisher said. The central banker dismissed the benign August producer price report released last week as unreliable. The best gauges of inflationary pressures "are not yet comforting,"

Fisher is not a voting member of the Federal Open Market Committee. New York Fed President Timothy Geithner will speak after the market closes. He will be on a panel at Columbia University. Geithner is a voting FOMC member.