The bond and mortgage markets started a little better this morning but with very thin volume. The 10-Year Note and MBSs are toying with key technical levels now and if the rally is to continue the 10-Year Note must get back below 2.00% and hold there…something that it hasn’t been able to achieve for any length of time. Italy sold more debt in a successful auction today increasing European stocks and supporting the U.S. equity markets in pre-opening trade. Italy‘s borrowing costs are declining, lessening concerns of default. The country sold 9 billion euros ($11.8B) of 6-month Treasury Bills at half the yield it agreed to pay at an auction of the securities last month. The Rome-based Treasury sold the 179-Day bills at a rate of 3.251%, down from 6.504% on November 25th. Demand was 1.7 times the amount of the offer, compared with 1.47 times last month. It also sold 1.733 billion euros of 2013 notes today to yield 4.853%, compared with a yield of 7.814% at the last auction on November 25th. The bid-to-cover ratio was 2.24, compared with 1.59 last month. Tomorrow Italy will auction four different securities, including a 10-Year bond; if the 10-Year Bond rate is under 7.00% it will be considered a good auction. The reaction to the strong Italian auctions lessens the demand for U.S. treasuries, at least for the moment,however by 900am this morning after some minor selling in Treasuries on the auction news, the 10-Year Note was back to its best levels prior to the auction results. At 930am the DJIA opened up +7, the 10-Year Note was up +5/32 at 1.98% (-2 bp) and mortgage prices were up +5/32 (.15 bp). Retail Sales in the week prior to Christmas were up 4.5% last week from a year earlier,according to data reported this morning. Sales for the week ending December 24th increased 0.9% from the previous week, according to a chain-store sales index released today by New York-based International Council of Shopping Centers. Yesterday December Consumer Confidence Index jumped much more than thought with expectations of 58 from 55.2 in November; as released the index was 64.5 the highest since last April. Weekly Jobless Claims have been declining for the last month. The November Unemployment Rate fell to 8.6% from 9.0%, as expected. November housing starts, permits and sales of existing and new home sales were better than forecast. The December Philadelphia Federal Reserve Index, as well as the Empire State Manufacturing Indexes were also better than estimates. GDP forecasts for growth in 2012 are up +2.4% while 2011 was 2.00%. Treasuries and mortgages are increasingly facing stronger headwinds. With the recent data and at least for the moment some relaxation of European fears, it is looking more likely that the decline in U.S. rates may be ending. Technicals are being tested but still holding and the likelihood of further declines in rates is becoming questionable. Likely, U.S. rates would be under some pressure this morning if it were not for the long weekend ahead. The good news so far today is that the bond and mortgage markets are trading better, ignoring the Italian auctions and the recent better economic data. There isn’t any data today and volume will continue to be light. Although rate markets are doing OK so far, there isn’t anything out there that is adding support this morning except what so far appears to be a soft equity market. The 10-Year Note has been testing its key averages recently but each times o far the note has managed to hold its positive bias. Don’t fight the tape, even though interest rates are likely to increase in the next month or two.
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