yield curve May move.....

The 10‐year yield rose another 13 bps last week to close the week at 2.13%. The yield is now up 52 bps for the month of May alone. Not only are longer maturities selling off, but the belly is as well. You can see that in the yield difference in the 2Y‐ and 5Y‐Treasuries. That spread has widened from less than 50 to over 75 bps. This is giving fixed income buyers an opportunity to find some value in shorter bonds. It also brings old strategies like rolling‐down‐the curve back into play.

As yields have risen,so have mortgage rates. In fact,the Fannie Mae Commitment rate has now risen to its highest level in over a year. Thirty‐year mortgage rates are now up over 60 bps in May alone. It will be interesting to see when this starts to bother the Fed. Housing is so critical to the economy right now that they could be forced to come in and try to talk mortgage rates back down.

The Market Outlook

TEFF

Things to ponder based upon TEFF -

- Loan pricing pressures increase

- Regulatory burden will continue to be a major part of life for the banking world

- Housing is still a wild card and one must tread lightly as we proceed through this cycle of recovery

End note: there is a lot for the Fed (and our fearless leaders in DC) to deal with in our economic progression as we crawl through the uncharted territory of the new normal where risk is becoming even more difficult to measure accurately...

The 10-year Treasury was bludgeoned yesterday with its yield rising 16.5 bps intraday. The yield opened at 2.00%, closed at 2.16%, and traded as high as 2.23% overnight. However, Treasuries have a little bit better support this morning and the 10-year yield has dropped back down to 2.14%. Many startled investors have questioned how far this can go. As discussed in our most recent economic outlook, central bank activism is keeping yields in a lower-than-should-be range. The economic data, on an absolute basis, points to yields being 100 to 200 bps higher. However, central bank asset purchases (Fed and BOJ currently active) have displaced investors and skewed the supply/demand dynamics in most liquid asset classes. Any hint that the Fed will slow or stop purchases will create volatility – particularly in bonds where the prices are so far from their fundamental valuations. The Fed will, in all likelihood, be forced to come in and talk yields back down before it’s all said and done. A sharp rise in yields could prove too much for the economy to handle, particularly when housing is so critical to growth. The question to answer today is how far will yields need to rise before the Fed becomes concerned. Of course, Europe could come to the rescue like they have several times, and put out some negative news which would have the same effect.

The CEO of a Wall Street lobbying group, Financial Services Forum, penned an op-ed in Politico today advocating for community banks. Rob Nichols said, “"[C]ommunity banks are struggling under the burden of what Federal Reserve Board Governor Elizabeth Duke recently called 'a tsunami of new regulations.' … It is critical that policymakers act to improve the circumstances for community banks. … {They] should be exempt from the most onerous and costly aspects of Dodd-Frank. In considering capital standards such as Basel III, regulators should formulate a simplified framework that adjusts requirement and compliance details to the smaller scale and more straightforward activities and operations of community banks." 

Home prices rose 1.12% in March according to the S&P CaseShiller Home Price Index, bringing prices up 10.87% year-over-year. Looking at the non-seasonally adjusted data, 18 of the 20 MSAs saw prices rise with Minneapolis (-1.1%) and New York (-0.4%) showing declines. San Francisco led the way higher, jumping 3.9% on the month. As prices continue to rise, consumer confidence will continue to improve. That was particularly apparent in another release yesterday morning, the Conference Board’s measure of consumer confidence. Consumer confidence rose to its highest level since 2008 in May. The headline index jumped from 69.0 to 76.2, well above expectations for a modest gain. Along with improving home prices, stocks continue to run up while gas prices remain relatively low. Consumption indicators for 2Q point to growth of 2.4% to 2.7% versus 3.2% in 1Q. While this might sound disappointing, it is markedly better than the indicators looked a month ago. 

Chart Of The Day

Source: The Market Online Today

economic fun facts

Treasury yields were broadly unchanged yesterday with the 10-year yield rising just 1 bps from 1.95% to 1.96%. Expect more of the same today as the markets await direction from the Fed tomorrow.

Treasury officially hit its debt ceiling on Sunday, and there is no apparent plan for a debt ceiling increase at this time. After Congress suspended the debt ceiling, the hope was that Washington would find a way to lift the ceiling prior to this event. However, they have not. Treasury is expected to take extraordinary, and creative, steps to avoid the ceiling being an issue. It is expected that they may be able to avert having to have Congressional action into October or November. 

A report published by the conservative AEI today says the Fed cannot juice the markets indefinitely. “The hope will be that the Fed will get lucky on its fourth try. But with Europe in recession, China slowing, and tighter fiscal policy, there is little reason to believe that having the Fed buy another $1 trillion-plus of bonds from banks will increase growth or reduce unemployment further. Whether or not a new round of QE boosts stocks again remains to be seen. I wouldn't bet on it.”  

(The Market Today ONLINE)

The continuation of the 'tigger bounce' of the new normal of uncharted territory......

and what will happen when the Fed stops buying???

for ponderment...

Sounds like the new normal of uncharted territory....

Keynes himself on the topic of inflation:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. 

The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. 

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Subprime 2.0

Something to watch as we make our way through the new normal of uncharted territory...

Subprime 2.0 - auto delinquency

by Tyler Durden on 05/15/2013 15:16 -0400

As we warned six weeks ago, the Fed's ZIRP side-effects have driven auto-lenders to scrape the bottom of the subprime-lending barrel once again (loans to subprime borrowers +18% YoY). It seems, based on the Fed's latest data, that this over-exuberant lending is coming back to bite once again as delinquent balances surge 23.9% year-over-year (though optimistically Experian reflects "obviously, we never want to see a rise in delinquencies or repossessions, but... they are still lower than the recession-level rates,"). As Experian also notes today,repossessions rose 16.9% year-over-year. All this as lending volumes overall rose 9.6% to $726 billion in Q1 2013 but average charge-off amounts rose by 9.8% to $7,401 on each defaulted loan - and the worse is yet to come, as "we continue to move forward, we should start to see more increases as some of the subprime loans coming onto the books begin to deteriorate." This will end well.

THE SCARIEST JOBS CHART EVER

Check out the last four recession lines – 1981, 1990, 2001 and 2007: the trend gets worse with each successive recession. Is this due to structural issues or something else?

What might this foretell for the next one?

Especially since we are not dealing with the foundational economic issues….and our fiscal and monetary policy handlers continue to create bubbles, bubbles and more bubbles.

THE SCARIEST JOBS CHART EVER

This morning we learned that the U.S. economy added 165,000 jobs in April.  And the unemployment rate fell to 7.5 percent.

Overall, the jobs report was much better than expected.

However, it continues to reflect a labor market that remains incredibly weak almost four years into the economic recovery.

Calculated Risk runs a chart every month that puts the current jobs recovery into perspective.

"This shows the depth of the recent employment recession — worse than any other post-war recession — and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis," writes Bill McBride of Calculated Risk.

Housing Bubble 2.0 Edition

Interesting data to ponder upon…..as we look to see where the housing market goes.

Housing Bubble 2.0 Edition: "25 Markets Where Flipping Homes Is Most Profitable"

Submitted by Tyler Durden on 05/02/2013

Tuesday's Case Shiller update index showed something very troubling: as a whole, the US housing market in its broadest sense, has barely budged in the past four years (chart). And yet, what is unmistakable, and what has given many the impression that there is a "recovery" (despite clear recent signals to the contrary) are media attempts to spark a buying frenzy in several of the key markets that were responsible for the prior housing bubble, such as Florida, California, Nevada and Arizona. And how do we know they are succeeding, if only until the Bernanke liquidity bubble pops again? Courtesy of articles such as this: "25 markets where flipping homes is most profitable." Nuff said.

The full-blown bubble may not be here, but what is worse is that the bubble is certainly raging in key "liquidity-pocket" MSAs, even as various other regions continue to drag the overall housing market ever lower. 

Which makes sense: in an America in which everything is increasingly polarized into two camps, and where even the Fed is schizophrenic about the future of the country, it is only logical that a New Normal housing bubble rages even as the overall housing market continues to tank.

Finally, it is quite obvious that none of these "homes" are being bought as homes, and all are basically speculative momentum chasing instruments, where everyone is certain a greater fool idiot will step up and buy the flip. And yes, we have seen all of this before and it ended in tears.

From RealtyTrac, as advice for those who just can't wait to flip that house:

Flipping  homes — buying, rehabbing and reselling for a profit usually within about 90  days — will likely become more favorable for investors in 2013 as home prices  are expected to continue climbing. And while buying  homes as rentals still offers a solid rate of return in many markets, even  buy-and-hold investors typically flip properties periodically to fund their ongoing  rental purchases.

RealtyTrac  selected the top 25 markets nationwide where flipping single family homes  offers the highest rate of return based on the flipper’s gross profit — the  difference between average original purchased price and the eventual flipped  sales price of a flipped home. 

construction spending trends

This is really an up and down non-trendable series of data!

Where is construction really headed?

U.S. construction spending decreased in March, pulled down by decreased public sector building.