Monday, December 22rd, Mortgage Rate Market Update

Monday Mortgage Market Update

Stocks lost ground yesterday morning and the decline accelerated in mid-afternoon. But stocks bounced in the final hour, leaving the Dow with a modest loss. Despite the late-session improvement, the other major indices still suffered hefty losses. The afternoon plunge helped lend some temporary support to bonds but they also finished well in the red as new supply kept them under pressure.

In late trading, the 10-Year Treasury Note was down by 14/32, raising its yield by 5 basis points to 2.17%; the Dow was down by 59.42 points to 8,519.69; and the Nasdaq was down by 31.97 points to 1,532.35.

A weak sales forecast from Toyota weighed against the auto sector, which had surged on Friday because of the announced government bailout measures for the industry. A poor earnings report from Walgreens pressured the retail sector and the threat of a credit downgrade of Alcoa sent that company's shares down sharply.

The energy sector was also hit by another decline in oil prices. In its first trading day as the front month futures contract, the price of a barrel of light, sweet crude for February delivery fell by $2.45 on the New York Mercantile Exchange to settle at $39.91.

The now-expired January contract closed lower last Thursday and Friday but yesterday's close for the February contract was the third lowest for the front month oil future since July of 2004. The problems in the auto industry may have acted as a reminder of declining demand for oil as the economy contracts.

Last week, the Organization of Petroleum Exporting Countries (OPEC) said that to support oil prices, the cartel would cut its output by 2.2 million barrels per day starting in January. But many analysts feel that some oil producing countries will be inclined to keep producing at higher levels in order to make up for some of the losses associated with the decline in price.

At its worst level of the day, the Dow was down by 206.85 points or 2.41% but by the end of the session it had trimmed the loss to just 0.69%. The S&P 500 had been down by 3.47% but finished with a loss of 1.83%. And the Nasdaq was down by 3.88% at its low, but closed with a loss of 2.04%.

Supply was an obstacle for bonds. The Treasury auctioned its monthly issue of 2-Year Notes on Monday The results of the sale were lukewarm but not terrible considering the record $38 billion offer size. The bid-to-cover ratio was 2.13, up slightly from last month's 2.08 but still the second lowest since July of 2006. Noncompetitive bids totaled about $343 million -- an exceptionally small amount for a 2-year offering.

And foreign demand was soft. Indirect competitive bids received 30.1% of the issue and 30.4% of all accepted competitive bids. The award portion was the lowest since September . . . .