Interest rates/Japan/Europe

In response to the near 2 month high in the 10 yr Treasury yield, said the average 30 yr mortgage rate rose to a 3 1/2 week high at 3.45%. It’s obviously still historically low but the move higher dilutes the Fed’s best attempts to lower it further. The day before the MBS driven QE3 began, the 30 yr FNMA coupon was 2.36%. It closed yesterday just 6 bps lower. Also, the Fed has spent about $650B on buying Treasuries 6-30 yrs out in the OT program begun on Sept 21, 2011. The day before it started the 10 yr yield was 1.94% and the 30 yr was 3.2% vs 1.82% and 3.0% respectively today. A lot of money has been spent between OT and QE3 for very little incremental reward. The true cost, yet to be determined, will of course occur when the likely market forced exit begins. More likely to seasonal distortions at yr end rather than the uptick in mortgage rates, the MBA said refi’s fell 13.8% and purchases were lower by 4.8%. Ahead of tomorrow’s decision from the BoJ, the yen is falling again and the Nikkei rallied another 2.4% to above 10,000 for the 1st time since April. In Europe, the euro is rising to near an 8 month high after Germany’s IFO business confidence figure rose 1 pt to 102.4 vs the est of 102. The drop in the Current component was offset by a 7 month high in Expectations. The ECB said they will again start accepting Greek bonds as collateral for repo. The Greek 10 yr bond is at a new high at .48, up another 2.5 pts. Lastly, Spanish PM Rajoy said “We have taken the decision to not ask” for a bailout but that doesn’t rule out “in the future we won’t take the decision to ask for it.”

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