December 15th, 2010 11:13 AM by Mel Samick
This past week, higher ten-year yields and the tax cut/extension compromise between President Obama and Republicans was the main event. Amid some Democrat dissensions, the President reached a deal with Republicans for the extension of the Bush era tax cuts in exchange for an additional thirteen months extension in unemployment benefits. This deal is expected to be passed before January 1st to ensure the lower tax rates remain intact for all taxpayers. If it passes we will expect an upward revised GDP for 2011 but the negative is that it will also worsen the budget deficit situation.
The Treasury's market witnessed a volatile week in the midst of the tax cut compromise as well as inflation fears and measures taken by developing countries to curb inflationary pressures. The ten-year yield jumped by 40 basis points and closed at 3.32 percent for the week. On the other hand, market volatility was down for the week and economic indicators were on the positive side. It seems like investors had priced in the further budget deficit and economic recovery and bought the bond market into a correction phase. However, the yield curve steepening helped the financial sector post gains and led the stock markets in an upward direction.
For the week, all major indices ended in positive territory. The Dow closed at 11,410 while the S&P 500 closed at 1,240 for the week. The financial sector followed by telecom and industrials led the market on the recovery path. For the month of October, consumers borrowed $3.5 billion, mostly for auto lending while continuing to retire $5.6 billion of balances on their revolving accounts, which gives good belief that customers preferred paying with cash for their recent holiday shopping. Also, another positive outlook for the industry sector can be seen with the shrinking of the Trade Deficit by nearly $38 billion in the month of October.
The troubled housing market didn't see anything in its favor. With treasury yields jumping up, mortgage rates moved in the same direction. At the end of week the Conforming Fixed 30-year rate leveled out at around 4.76%, while the Conforming Fixed 15-year rate finished around 4.16%. Standard 5/1 ARM rates were seen hovering around 3.28%.
Information Provided by Amtrust Bank Capital Markets