Mortgage bonds were able to bounce higher yesterday afternoon following the stellar results from the 10 Year Treasury Note Auction. The strength of bond purchases showed the market that investors are willing to accept a 2% return when it is backed by the strength of the US government. Although that seems extremely low, it is significantly greater than the returns offered by Germany and other European governments for their equivalent. Therefore, many of the buyers are likely foreign investors looking to take advantage of higher returns in the US which are bolstered by a continued strengthening US dollar where the currency exchange is providing additional opportunities to profit.
Initial Unemployment Claims for the week ending 02/07/2015 were reported this morning to be 304,000. This represents an increase of 25,000 from last week’s numbers, which were revised higher by 1,000 from 278,000 up to 279,000. The increase in claims was somewhat anticipated as the oil market crash works its way through oil related industries. Oil rigs continue to close across the country, with parts of Utah feeling much of the pain. With the number of rigs in the US falling to a three year low, the job casualties are mounting. It is estimated that a rig employs 350 people. Times that by the number of rigs shutting down and you see why jobless claims are on the rise.
Bonds continue to flirt with the bottom of the channel. In fact, in late trading yesterday bonds lost all their gains made following the 10 YTN auction results. The longer bonds sit on support, the heavier they become and less likely to make a bounce higher. Therefore, the risk of floating is increasing. Although there is likelihood that we will see an improvement, those who are risk adverse may want to consider taking their chips off the table and locking in.