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Market Commentary

Market Commentary

February 02, 2015
10-YEAR NOTES   105-07 (+07)
FN 3.5% COUPON   105-20 (-02)
SUPPORT   2.40%
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   This week we get data on Income, Spending, Factory Orders, The Trade Balance, and Nonfarm Payrolls/Unemployment rate. With a largely “data dependent” Federal Reserve, this week’s focus will be on the January Nonfarm Payrolls and Unemployment report to validate the FOMC’s latest claims that the labor market continues to improve. Nonfarm payrolls in December advanced 252K after jumping a revised 353K in November, and the Unemployment Rate decreased to 5.6% from 5.8% November. Expectations for Friday’s report are for 232K more Jobs and no change to the Unemployment Rate. For the month of December, Personal Income increased $41.3 Billion (+0.3%), and Disposable Personal Income (DPI) increased $35.8 Billion (+0.3%). Personal consumption expenditures (PCE) decreased $40.0 Billion (-0.3%) for the largest monthly drop since September 2009. Consumers are buying fewer cars, paying less at the pump, and saving more; the savings rate advanced from 4.3% to 4.9%. The decline in energy costs is weighing on inflation with the PCE Deflator (MoM) down -0.2% in December. The PCE Core (MoM), which excludes food and energy, was unchanged in December. ISM Manufacturing for December posted 55.5, down -3.2 points from November for the slowest monthly growth since June, and for January ISM Manufacturing declined to 53.5 (consensus 54.5).
   U.S. Treasuries remain elevated as global economic weakness continues to spur demand for safer U.S. assets. Treasuries returned +2.9% during the month of January, for the biggest monthly advance since December 2008. The recent decline in Oil prices and related layoffs in the sector have led to the biggest strike at U.S. refineries since 1980 which drove Oil even lower as investors believe the strike may curtail production and worsen the global oversupply; West Texas Intermediate futures dropped -3.3%. European stocks continue to decline amid concerns that more anti-austerity parties will gather support following Greece’s elections; the Stoxx Europe 600 Index dipped -0.4%. Greece’s 3-Year notes reversed six consecutive days of increasing yields, down -62 bps to 18.52% as their newly elected leaders begin a tour to gain support for a new debt deal. Greece’s 10-Year yield fell -37 bps to 10.80%. The ruble continues to grind lower for a fourth straight day after the bank’s surprise 200 bps rate cut and Moody's/S&P cut Russia’s investment rating; the Ruble declined -2.3% to 69.225 vs. the dollar. Moody’s rating of Russian bonds remains one step above the S&P’s at the lowest investment grade.
   On Friday, the 10-Year note reversed the prior days sell-off with a +26 tick rally pulling yields down -9.0 bps to 1.662%. The coupon stack compressed 2.0-4.25 ticks in the production coupons led by the 3.5/3.0 swap, down -4.25 ticks. MBS underperformed treasury hedges by 1.5-3.5 ticks led by the 3.0% at 3.0 ticks wider to the basis. Short term Volatility rose +3.03 bps (3Mx10Y 86.53), and longer term Volatility increased +0.01 bps (5Yx10Y 85.06). The curve bull flattened, with 2s10s down -3.6 bps to 119.6, pulling the 20 day average to 133.5 vs. 147.5 prior. Long-end yields fell, pulling the 30-Year bond down -9.1 bps to 2.454%. Even with the 30-Year bond near all-time record low yields treasuries are still looking attractive vs. lower, and some negative, returns with foreign debt. The 30-Year current coupon fell -8.0 bps to 2.44% vs. 2.52% prior, and the 15-Year fell -7.0 bps to 1.80% vs. 1.87% prior. 15/30 swaps lost 1.5-3.25 ticks in the production coupons led by the 2.5/3.0 swap at -3.25 ticks. G2/FNs declined 1.0-2.0 ticks led by a +2.0 tick drop in the 3.0% coupon. The G2/FN 3.5% swap fell to -0-1.5 vs. -0-0.25 prior. Treasuries are advancing this morning in response to the disappointing ISM Manufacturing Data and the curve has bear steepened with 2s10s up +0.9 bps with yield on the 10-Year note just above resistance at 1.667%.
This Week's Events:
02/02 Personal Income 05:30 December 0.2% 0.3% 0.4% 0.3%
02/02 Personal Spending 05:30 December -0.2% -0.3% 0.6% 0.5%
02/02 ISM Manufacturing 07:00 January 54.5 53.5 55.5 55.1
02/03 Factory Orders 07:00 December -2.4% - -0.7% -
02/04 MBA Mortgage Applications 04:00 January 30 - - -3.2% -
02/04 ADP Employment Change 05:15 January 225K - 241K -
02/04 ISM Non-Manufacturing Composite 07:00 January 56.5 - 56.2 56.5
02/05 Jobless Claims 05:30 January 31 290K - 265K -
02/05 Continuing Claims 05:30 January 24 2400K - 2385K -
02/05 Trade Balance 05:30 December -$38.0 Billion - -$39.0 Billion  
02/06 Nonfarm Payrolls 05:30 January 232K - 252K -
02/06 Unemployment Rate 05:30 January 5.6% - 5.6% -
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