Purchase applications jump and the federal deficit balloons

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Published Date 5/6/2020

April ADP private jobs declined by 20.236 mil right on forecasts; March private jobs were revised from -27K to -149K. Numbers that defy imagination, although the decline was expected, it's scary seeing it in print. The initial reaction wasn't much; the stock indexes a little better while the 10 yr note increased 3 bps, and at 8:30 am ET traded at its highest rate in three weeks.

Weekly MBA mortgage applications were essentially unchanged last week; the composite +0.1%, purchase apps +6.0% and refinances down 2.0%. The increase in purchases is nice to see in this present economic and health situation, suggests the distancing may not be as detrimental to home sales as was widely thought. That said, it's one week and not a trend yet.

Treasury announced it would begin issuing 20 yr bonds again, there was talk about it a few weeks ago but now official. With debt increasing looks like Treasury will increase borrowing with a focus more at the long end (10s through 30s). Treasury laid out its plan to finance the rapidly increasing debt in a release this morning, saying it has already borrowed $1.46 trillion of the $3 trillion it needs to borrow on net. While the initial increases in financing were focused on Treasury bills, Treasury said it intends to increase auction sizes for 2-year, 3-year, and 5-year note auctions by $2B per month. It will increase the auction size of the 7-year by $3B per month over the next 3 months. The size of the 7-year note will increase by $9B by the end of July. It will increase both new and reopened 10-year note auctions by $5B and the 30-year new and reopened 30-year bond auctions by $3B. Treasury also will sell $20B of 20-year bonds in the initial auction on May 20. It will reopen the 20-year bond in both June and July in amounts of $17B each. The Fed is easing the burden somewhat, having bought roughly $1.3 trillion of Treasuries since mid-March. The Congressional Budget Office has forecast the federal budget deficit to be $3.7 trillion for the fiscal year 2020 (ending on Sept 30).

The Treasury announcement is pushing the 10 yr note yield higher this morning. We have noted numerous times here that technically the 10 yr has rock-solid resistance at the 0.60% area since the beginning of April, and now it becomes a little more apparent when you look at the 10 yr chart. Fundamentally, the resistance is due to the increase in debt issuance. Looking for technical support, the 10 yr can increase to 0.74%. If that doesn't hold 0.80% is the next support level.

Once again, with emphasis, the most under-valued asset these days is gold. Normally gold has been an asset to protect against inflation; presently, the worth is going to be driven by the decline in the worth of currencies with central banks' debt escalation. Another popular investment being touted by some analysts is to by high grade corporate debt that is also increasing rapidly; that is only a good idea as long as the economy improves quickly as Trump, the Fed and most investors buying equities are forecasting. If recovery isn't as strong, or the economy doesn't rebound with the gusto that is currently believed, those corporate bonds may suffer.

Source: TBWS

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