Morning Report: Bonds testing support 1/10/18

Vital Statistics:

Last Change
S&P Futures 2741.5 -10.8
Eurostoxx Index 398.0 -216.0
Oil (WTI) 63.6 .06.6
US dollar index 85.6 -0.4
10 Year Govt Bond Yield 2.58%
Current Coupon Fannie Mae TBA 101.75
Current Coupon Ginnie Mae TBA 102.875
30 Year Fixed Rate Mortgage 4.01

Stocks and bonds are lower this morning on news that China may slow or halt its purchases of Treasuries.

Bonds are currently trading at 2.58% after Chinese officials recommended slowing or halting purchases of US Treasuries. Driving this decision are the relative attractiveness of US Treasuries and the possibility of a trade war. Between the Fed tapering their purchases of Treasuries, and potential disinvestment of the Chinese, Treasuries are heavy. Ultimately, this is about the trade deficit, which is the difference in value between what we import from China and what we export to China. The deficit is simply filled in by Treasury purchases. While a trade war is probably just saber-rattling, a drop in trade will probably mean a drop in the trade deficit, which means less demand for Treasuries. Ultimately, the US would prefer the Chinese to buy less Treasuries since that would mean they are buying more goods and services.

Note that the recent peak in the 10 year was 2.62% in March this year. We are close to breaking through support, which would probably trigger at least some technically-driven selling. We have a 10 year bond auction this afternoon at 1:00 pm EST. If we get a lousy bid / cover ratio that could be the catalyst to break through that level.

We have a lot of Fed-speak today, with Charles Evans, Robert Kaplan and James Bullard speaking.

Mortgage Applications rose 8.3% in a holiday-shortened week, as purchases rose 5% and refis rose 11%. The average contract rate for the 30 year conforming rate rose a basis point to 4.23%.

Import prices rose 0.1% MOM and 0.3% YOY, while export prices fell 0.1% MOM and rose 2.6% YOY.

Lennar reported fourth quarter earnings of $1.29 a share which missed analyst expectations. An undisclosed “one-time strategic transaction” was delayed until the first quarter, which apparently drove the miss. Revenues increased 12%, while deliveries were up 5% in units. Backlog was up 17% in units and 23% in dollars. Gross margins fell by 90 basis points to 22.4%. Lennar is also in the process of buying CalAtlantic, and that deal should close in February.

The National Association of Homebuilders projects that 653,000 new homes will be sold in 2018, an increase of 5.4% from 2017. This won’t be enough to meet demand. Lack of labor and land are the limiting factors, as well as government regulations. It seems that “urban villages” are the flavor du jour, with apartments and walkable developments that mix commercial and residential.

16 Responses

  1. This Google lawsuit will be interesting. Is the left achieving censorship by controlling the access to information?

    Liked by 1 person

  2. Genuine question: What is the check on a corrupt and lawless judiciary?

    Voters can vote a lawless congress or president out of office. Congress can refuse to provide funds for, and even impeach, a president it deems to be acting in an unconstitutional manner. The president can refuse to sign into law any bill that he deems to be unconstitutional passed by a lawless congress. The judiciary can refuse to apply laws passed by congress, or “regulations” imposed by the executive, that it deems to be unconstitutional.

    But when the judiciary behaves in a thoroughly corrupt, lawless, and unconstitutional manner, what is the check on it from the other branches of the government, or the people?


    • It’s supposed to be the legislature where judges aren’t elected. But I’m not holding my breath.


      • KW:

        It’s supposed to be the legislature where judges aren’t elected.

        Sure, but how? If the legislature acts in an unconstitutional manner, the courts are in a position to counter it by simply declaring it so and refusing to apply the law. That power is inherent in what the court’s exist to do. But if the court acts in an unconstitutional manner and simply refuses to apply a perfectly constitutional law, what power does the legislature or the executive have to counter the courts?

        McWing suggests impeachment, but it seems to me that impeachment is reserved for situations other than simple disagreement between the branches over the meaning of the Constitution. If the executive disagrees with Congress over the constitutionality of a proposed law, that disagreement can be expressed and effected through the normal exercise of power, ie veto the bill, without seeking to remove Congressmen from office. Likewise the courts can do the same through its rulings, also without seeking to remove particular congressmen or the president from office. But what power does the legislature and/or executive have to express and effect disagreement with the court over what is and is not constitutional without removing particular judges from office?

        I’ve been thinking about this, and the answer isn’t obvious to me. At first glance, there seems to be no way for the other two branches to counter the declarations of the court, even when they are obviously contrary to the Constitution (as they increasingly have become). I think that the only power they have is to either ignore court rulings entirely, or respect court rulings as effective only for the individual case heard, and not as applicable more generally, and continue to enforce the law under question except against the specific parties involved in the original ruling. Doing so would undoubtedly create an uproar and calls of a constitutional crisis. But it seems to me that without the ability to counter court rulings that are themselves unconstitutional, the three branches cannot be said to be co-equal, but instead it is the case that the judiciary is supreme to the other two branches. And I think that is precisely how many in the judiciary have come to view themselves, ie as supreme to the other branches of government.

        Liked by 1 person

      • McWing:


        See my response to KW. I think that the power of impeachment exists for reasons other than managing disagreements between the branches over what is and is not constitutional.


    • What would happen if Trump just said: “Yes, this is the Nutty 9th, and it is just red meat for the left that going to get overturned anyway, so I’m just going to ignore this order…”


      • Brent:

        What would happen if Trump just said: “Yes, this is the Nutty 9th, and it is just red meat for the left that going to get overturned anyway, so I’m just going to ignore this order…”

        I would love to see what would happen, but I suspect we would be treated to endless (albeit ironic) coverage accusing Trump of trampling on the rule of law and precipitating a Constitutional crisis.

        Liked by 1 person

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