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No scheduled news today and the market seems to be catching its breath. Yesterday’s
bond rally was sparked by the shockingly low Philly Fed outlook. The stock
market beating was over global concerns and specifically the EURO banks which
appear to be on the brink of disaster.

We did pierce the trend line on the 3.5’s and that could signal a drop to the
bottom of the trading range. Keep in mind with of this uncertainty, bonds could
continue to rally, in spite of what the charts my tell us. The charts are
warning of a correction so stay mindful of that.

Very early this morning global stock markets have been hit hard again from Asia to Europe and in the US futures pre-opening trading. Last night the US 10 yr note traded down to 2.03%, it may have been lower but at 2:00 am this morning that is where it sat. At 8:00 this morning even with stocks expected to open lower
again, the 10 yr note was off 10/32 at 2.10% +3 bp and mortgages were down as
much as 14/32 (.44 bp) from yesterday’s close. Volatility continues to
increase, as it does when the risks increase, whether trading interest rates,
currencies or stocks.

Today is going to be very interesting in the bond and mortgage markets; at 9:00 the 10 yr note traded down 5/32 at 2.09% +2 bp and mortgage prices were down 14/32 (.44 bp) from yesterday’s close. At 9:00 the
DJIA was -137, NASDAQ -22, and S&P -15, and gold up $31.00. That US
treasuries and mortgages are trading lower with the stock market also being hit
goes contrary to what has been the norm for months. The question now is have US
interest rate markets hit their lows in yields? Yesterday the 10 yr made a run
down to 1.97% but it quickly jumped back above 2.00% ending the day at 2.07%,
last night the 10 made another run towards 2.00% and failed again.

Just about every firm has now lowered the growth forecasts for the US economy. Recession is now the new word of the day. In Europe the banking system remains fragile; earlier this week France and Germany
met, avoiding any comments about issuing euro bonds to shore up banks. Early
this morning the EU reported it may present draft legislation along with a
report on the feasibility of common bonds. More than $6 trillion has been
erased from the value of global equities this month on signs the U.S. recovery
is stumbling, while the cost of insuring European sovereign debt is back to
levels that triggered the region’s central bank to buy Italian and Spanish
bonds on Aug. 8.

Bank of America, troubled by increasing losses on mortgage foreclosures and penalties for improper foreclosure processes, announced it will cut another 3500 jobs; previously the bank cut 2500 jobs. Its
stock is tumbling as are all the big banks in the US that may have
counter-party risks with banks in Europe that are suffering huge losses on
their stocks and losses expected when those banks have to write down sovereign
debt.

There are no economic releases to think about today; the
stock market trading will dominate all news again today. Going into the weekend
traders are likely to level off some of the bearish trades. Although the stock
market is opening lower, we wouldn’t be surprised that by the end of the day
losses may be pared back. Investors are scrambling for liquidity as the
economic outlook has turned 180 degrees in just three weeks.

At 9:30 the DJIA opened -95, NASDAQ -24, S&P -9; the open wasn’t quite as bad as futures markets were
implying. The 10 yr note at 9:30 improved to -3/32 while mortgage prices were -9/32 (.28 bp)
from yesterday’s closes. Trade is unusual this morning, there is no movement
into US treasuries on additional safe haven buys; it looks like investors are
choosing to go into gold and not treasuries, at least so far. The day is
setting up for even more potential of volatility; the bond and mortgage markets
are surprising traders, actually weaker on another decline in equities.

Treasuries and mortgage markets are unusually soft this morning with the stock market weaker, if the equity markets reverse and improve this afternoon, treasuries and mortgages may take additional hits.
Technically the 10 failing to hold at 2.00% is momentarily troubling, we have
to back 60 years to find interest rates this low. By 10:00 the stock indexes
have already shed their opening levels, although still weaker markets are
finding some support. Be extremely careful now in floating loans; we suggest locking
until the 10 yr can move below 2.00% (it can).

The Troll