Morning Report – Deutsche Bank predicting a 2.25% bond yield by the end of the year 11/04/13

Vital Statistics:

Last Change Percent
S&P Futures 1755.0 4.0 0.23%
Eurostoxx Index 3062.3 -5.7 -0.18%
Oil (WTI) 95.64 -0.7 -0.77%
LIBOR 0.238 -0.004 -1.76%
US Dollar Index (DXY) 80.53 0.338 0.42%
10 Year Govt Bond Yield 2.58% 0.02%
Current Coupon Ginnie Mae TBA 106.2 -0.3
Current Coupon Fannie Mae TBA 105.2 0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.15
Markets are up as Twitter increases the price of its IPO from $17-$20 to $23-$25. Bonds and MBS are up as well.
This week promises to be a big one with Friday’s jobs report. The bar is set pretty low – nonfarm payrolls are expected to increase 125k. Given that this report will include the government shutdown, you probably should put an asterisk next to it, but all jobs reports are huge these days. The unemployment rate is expected to tick up to 7.3% from 7.2%. The ADP report, which forecasts the same payroll number came in at 130k, weaker than the 150k estimate. Given the shutdown, I would expect a good jobs report to be bond bearish and a bad jobs report to not necessarily be bond bullish. Weakness would be taken as par for the course given the shutdown, and strength in spite of the shutdown would bring a December tapering back into the picture.
Deutsche Bank is out with a gutsy call in Treasuries – a 2.25% yield on the 10-year by the end of the year. The reason? The economy isn’t growing as strongly as forecast. That said, Friday’s ISM report was reasonably strong, but overall consumer confidence has been dropping, and we didn’t see blockbuster numbers out of the retailers for back-to-school. It certainly makes you wonder what the Fed is looking at when they talk about a strengthening economy. Remember, however the Fed has been consistently high in its economic forecasts for GDP growth. The last time rates were at that level, the Bankrate average 30 year fixed rate mortgage was below 4%.
Homebuilder Tri Pointe Homes is making a big bet on housing construction with its purchase of timber conglomerate Weyerhaeuser’s home-building division. In many ways, this deal simply recognizes the reality that there is a huge advantage to size for the builders. On one hand, you have small builders who are having difficulty borrowing money, and on the other hand the big builders are having money thrown at them by the market. Exhibit (a) for that was KB Home’s (KBH) convertible bond deal earlier this year. 10 year paper, 1.375% coupon, initial conversion premium at 50%.
71% of single family homes were built before 1990, according to RealtyTrac’s Aging Home Analysis. This speaks to the merger mentioned above (we have underbuilt for 6 years) and represents an opportunity for 203k loans.

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