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For Friday, July 31st, 2009 I am recommending to float interest rates today. Yesterday, Mortgage Bonds mounted an impressive reversal higher. Traders were prepared for lousy auction results, and had begun the day to the downside – but surprisingly decent foreign participation made the 7-year Note auction turn out ok. It wasn’t great – but more importantly, it wasn’t bad. Bond prices reversed higher as Traders are pleased to be done with auctions for this week. This Supply issue seems to now be the biggest current factor driving interest rates. Advanced Gross Domestic Product for the 2nd Quarter fell at a 1.0% annual rate, better than the 1.5% decline that was expected. However, the 1st Quarter was revised to an even worse -6.4% versus the -5.5% originally reported. GDP has fallen for four straight quarters for the first time since government records started in 1947. Additionally, the report showed some negative reads on consumer spending, which accounts for over two-thirds of US economic activity. Spending dropped 1.2% in the 2nd Quarter after a 0.6% gain in the previous quarter. With the labor market continuing to struggle, we don't see consumer spending picking up too quickly in the near future. Also, people are tucking more money away, as evidenced by the savings rate which jumped 5.2% in the 2nd Quarter, the highest level since 1998. It wasn't long ago when we actually had a negative savings rate. An update on the Fed’s Mortgage Bond purchases – the New York Fed purchased $20B in Mortgage Backed Securities this week, mainly concentrated in the 4.5% - 5% coupons, bringing the total to just over $700B out of the $1.25T slated.
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