- Mortgage refinancing activity dips a bit on rising rates but purchase sub-index remains strong
- 10-year T-note auction to yield near 1.84%
- Markets are expecting fresh ECB stimulus on Thursday
- EIA report expected to show another increase in U.S. crude oil inventories
Mortgage refinancing activity dips a bit on rising rates but purchase sub-index remains strong — The 30-year mortgage rate last week rose by 2 bp to 3.64%, recovering a bit from the 1-year low of 3.62% posted in the previous week. Mortgage rates may creep a bit higher over the near-term due to the 20 bp rise in the 10-year T-note yield over the past several weeks, although the 10-year yield yesterday dropped sharply by -8 bp to 1.83%. The MBA refinancing sub-index soared during January and the first half of February to a 1-year high. However, the index has fallen by a total of -15% in the past two reporting weeks as mortgage rates bottomed out.
Meanwhile, the MBA purchase sub-index remains generally strong at the upper end of the range seen in recent years, which bodes well for home buying activity. Existing home sales in January rose by +0.4% to post a 6-month high of 5.47 million units, which was just slightly below the 8-3/4 year high of 5.48 million units posted in July 2015.
10-year T-note auction to yield near 1.84% — The Treasury today will sell $20 billion of 10-year T-notes in the first reopening of the 1-5/8% 10-year T-note of Feb 2026 that the Treasury first sold in February. The Treasury will then conclude this week’s $56 billion coupon package by selling $12 billion of 30-year T-bonds on Thursday. The size of this week’s 10-year and 30-year auctions are $1 billion smaller than the sizes seen over the last six years. The Treasury has reduced the size of coupon auctions in favor of boosting T-bill auction sizes in an effort to dampen long-term yields.
Today’s 10-year T-note issue was trading at 1.84% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 0.37% against the current 10-year breakeven inflation expectations rate of 1.47%.
The 12-auction averages for the 10-year are as follows: 2.64 bid cover ratio, $26 million in non-competitive bids to mostly retail investors, 3.9 bp tail to the median yield, 11.4 bp tail to the low yield, and 44% taken at the high yield. The 10-year is the second most popular security among foreign investors and central banks behind the 10-year TIPS. Indirect bidders, a proxy for foreign buying, have taken an average of 60.7% of the last twelve 10-year T-note auctions, which is well above the average of 60.7% for all recent Treasury coupon auctions.
Markets are expecting fresh ECB stimulus on Thursday — The market consensus is that the ECB at its regular policy meeting on Thursday will cut its deposit rate by another -10 bp from the current -0.30% level and may also expand its QE program. The ECB is currently only about half way through its QE program, which involves the monthly purchase of 60 billion euros of securities through March 2017, finally totaling 1.5 trillion euros.
The ECB on Thursday may introduce a tiered system for its deposit facility that puts less strain on banks’ profitability by subjecting a smaller amount of excess reserves to the negative deposit rate. However, that would impede the transmission of negative interest rates to the public and thus reduce the effectiveness of the ECB’s attempt to use negative interest rates to force banks, businesses and consumers to put money to work in order to stimulate the economy.
The ECB is seeking further stimulus measures to address weak GDP growth and low inflation. After two years of negative Eurozone GDP growth in 2013 (-0.9%) and 2014 (-0.3%), GDP in 2015 finally turned positive to +0.9%. However, the market consensus is that Eurozone GDP will improve to only +1.6% this year and then remain near that level in 2017-18. Meanwhile, the Eurozone CPI in February turned negative again to -0.2% y/y and the core CPI fell to +0.7% y/y, only +0.1 point above the record low of +0.6% posted in early 2015.
EIA report expected to show another increase in U.S. crude oil inventories — The market consensus for today’s weekly EIA report is for a +3.5 million bbl rise in U.S. crude oil inventories, a -1.5 million bbl decline in gasoline inventories, a +900,000 bbl rise in distillate inventories, and a -0.4 point decline in the refinery utilization rate to 87.9%.
U.S. crude oil inventories last week soared by +10.4 million bbl to a record high of 517.981 million bbls. U.S. oil inventories are now a massive +141 million bbls (+37.5%) above the 5-year seasonal average. Moreover, crude oil inventories at the Cushing hub, where Nymex WTI futures are priced, rose to a record high of 66.256 million bbls in last week’s EIA report. The EIA says that Cushing has a total storage capacity of 73 million bbls, meaning that inventories there have room to rise by only another 6.7 million bbls.
Meanwhile, there are more than ample supplies of U.S. product inventories, which are keeping downward pressure on gasoline and distillate prices. U.S. gasoline inventories are +9.8% above the 5-year seasonal average and distillate inventories are +24.2% above average.
U.S. oil production has recently dropped on a sustained basis with a 6-week decline of -1.4% to last week’s new 1-1/3 year low of 9.077 million bpd. U.S. oil production has now fallen by -5.5% from the 43-year high posted in June 2015. The latest drop in production is being caused by the fact that another 146 oil rigs have closed just since the beginning of the year. The number of active U.S. oil rigs has now plunged by a total of 1,217 rigs (-76%) to a 6-1/4 year low of 392 rigs from the peak of 1,609 rigs seen in Oct 2014.
