The final day of the year; nothing of substance to think about. No news of consequence out of Europe, the various markets in Europe are slightly better today. At 9:00 this morning the US stock indexes traded fractionally lower, the 10 yr note +3/32 and mortgages at 9:00 +5/32 (.15 bp).

No economic data today; trading will be thin, by 1:00 most will have left the area. Markets open all day.

Europe remains the key for US interest rates, not news that safety trades have pushed US yields to all-time lows. In Jan, after a few weeks of quiet from the EU, ECB, and the IMF, expect renewed comments and "plans" on how to deal with the increasing debt mess and banking concerns inEurope's banks. At the end of the year the dangling question that has hung over global markets for two years hasn't changed. Can officials of various bodies actually solve the debt crisis in a manner that doesn't lead to default? And where is the money going to come from to relieve the region's banks? At the end of day so far, there isn't enough money or near term solution to the developing crisis. WillEurope drag global economies down as it re-enters recession?

At 9:30 the DJIA opened -14, 10 yr +3/32 at 1.89% -1 bp and mortgage prices after being +.15 bp at 9:00 fell back to +.09 bp on 30 yr MBSs.

The rest of the day should be quiet with little changes in stock indexes and interest rates. The outlook for interest rates remains positive but uneasy at these low levels. We are still concerned that the lows may have already been achieved when the 10 yr hit 1.70% last Sept. Lower rates from these levels depend on the moves made in Europe to corral what appears to be coming defaults; bailouts from the ECB, IMF and EU along with Germany and France are needed, so far that hasn't happened----only talk.

Started a little better this morning in the bond and mortgage markets, still with very thin volume. The 10 yr note and MBSs are toying with key technical levels now, if the rally is to continue the 10 must get back below 2.00% and hold there---something that it hasn't been able to achieve for any length of time. Italy sold more debt in a successful auction today increasing European stocks and supporting the US equity markets in pre-opening trade.

Italy's borrowing costs are declining, lessening concerns of default. The country sold 9 billion euros ($11.8B) of six- month Treasury bills at half the yield it agreed to pay at an auction of the securities last month. The Rome-based Treasury sold the 179-day bills at a rate of 3.251%, down from 6.504% on Nov. 25. Demand was 1.7 times the amount on offer, compared with 1.47 times last month. It also sold 1.733 billion euros of 2013 notes today to yield 4.853%, compared with a yield of 7.814% at the last auction on Nov. 25. The bid-to-cover ratio was 2.24, compared with 1.59 last month. Tomorrow Italy will auction four different securities, including a 10-year bond; if the 10 yr rate is under 7.00% it will be considered a good auction.  

The reaction to the strong Italian auctions lessens the demand for US treasuries, at least at the moment; however by 9:00 this morning after some minor selling in treasuries on the auction news, the 10 yr is back to its best levels prior to the auction results. At 9:30 the DJIA opened +7, 10 yr +5/32 at 1.98% -2 bp and mortgage prices +5/32 (.15 bp).

Retail sales in the week prior to Christmas were up 4.5% last week from a year earlier,according to data reported this morning. Sales for the week ending Dec. 24 increased 0.9% from the previous week, according to a chain-store sales index released today by New York-based International Council of Shopping Centers. Yesterday Dec consumer confidence index jumped much more than thought, expectations were at 58 frm 55.2 in Nov, as released the index was 64.5 the highest since last April. Weekly jobless claims have been declining for the last month; the Nov unemployment rate fell to 8.6% frm 9.0% expected. Nov housing starts, permits, sales of existing and new home sales were better than forecast. The Dec Philly Fed index as well as the Empire State manufacturing indexes were also better than estimates. Forecasts for growth in 2012 are at +2.4% GDP, 2011 at 2.00%. 

Treasuries and mortgages are increasingly facing stronger headwinds; with the recent data and at least for the moment some relaxation of Europe fears it is looking more likely that the decline in US rates may be ending. Technicals are being tested although still holding, the likelihood of further declines in rates is becoming questionable. Likely US rates would be under some pressure this morning if it were not for the long weekend ahead. 

The good news so far today; the bond and mortgage markets are trading better, ignoring the Italian auctions and the recent better economic data. There isn't any data today and volume will continue to be light. Although rate markets are doing OK so far; there isn't anything out there that is adding support this morning except what so appears to be a soft equity market. The 10 yr is testing its key averages recently, but each time so far the note manages to hold its positive bias; we don't fight the tape even though interest rates are likely to increase in the next month or two.

Last Friday treasuries took a fairly large hit as traders backed away from heavy long positions into the long weekend; mortgage prices were soft all day but also on thin trading and following the bond market. This morning treasuries opened a little better with mortgage prices generally unchanged from Friday's close. This week is still on holiday with many not working. The week doesn't have much data and it is unlikely there will be much out of Europe to jostle markets until after the first of the year.

The bellwether 10 yr note continues to resist trading much under 2.00%, the averages are moving lower daily frm the 20 day to the 100 day; unless the bond market continues to improve quickly the technical picture will change to one of a more bearish outlook. In our opinion unless there is an actual default in Europe the US rate markets are going to turn slightly bearish with yields increasing somewhat. Not looking for a big increase in rates but the prolonged rally looks as if it has stalled. TheU.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995; a very weak economy, no inflation and a huge fear factor contributed to the decline in rates.

This is the time of year when we hear a multitude of economic forecasts from economists.From what we have read over the last few days, the consensus for 2012 is better based on various surveys. Economists surveyed by Bloomberg and Reuters are expecting GDP growth in 2012 at +2.4% frm 2011 that is under 2.00%. Of course most forecasts have the caveat that Europe could drag the world back into recession and a global credit crisis if banks in the region fail or sovereign debt defaults occur. 2012 like 2011 will be held captive by Europe's continuing inability to accomplish much so far.

The S&P/Case-Shiller index of property values in 20 cities dropped 3.4% from October 2010after decreasing 3.5% in the year ended September, the New York-based group said today. The median forecast of 27 economists in a Bloomberg News survey projected a 3.2% decrease. This report gets little if any attention from bond traders; no real news in it.

At 10:00 Dec consumer confidence index expected at 58 frm 56 in Nov. As reported the confidence index jumped to its highest level since last April to 64.5 frm a revised Nov at 55.2; the present situation index increased to 46.7 frm 38.3 and the expectations index up to 76.4 frm 66.4. A much better outlook from last month and better than what was expected; there was however no reaction to the data in either the stock or bond market----so far.

This Week's Economic Calendar:

       Tuesday;

           9:00 am Oct Case/Shiller housing index (as reported -3.4%)

           10:00 am Dec consumer confidence index (as reported 64.5 frm 55.2)

       Thursday;

           8:30 weekly jobless claims (+4K to 368K)

           9:45 am Chicago purchasing mgrs index (60.1 frm 62.6(

           10:00 am Nov pending home sales (+0.6%)

At 9:30 the DJIA opened -20; 10 yr note +2/32 at 2.01% and mortgage prices at 9:30 generally unchanged.

Not looking for much this week; another short week and year end doldrums should keep things relatively quiet until next week. The technical picture is weakening in the bond market, unless the 10 yr improves and holds under 2.00% (which up until now has not occurred) rates from a technical outlook will likely begin to increase next week.

Happy Holidays from Capital Funding & Solutions!!!

Treasuries and mortgages opened weaker this morning in very light trading, most traders are off today. The markets will close early this afternoon; all but the stock market that will go with normal hours. 

At 8:30 Nov durable goods orders were up 3.8% (forecasts +2.0%); ex transportation orders up 0.3% as expected; demand for aircraft outweighed declines in spending on computers and equipment.  Demand for business equipment excluding military hardware and aircraft dropped 1.2% in November, the biggest decline since January. Nov personal income and spending, both up 0.1%; slightly weaker than expected. The stock market opened +41 on increasing belief at the moment that the US economy is recovering and improving. Whether that is the case, at the present that is what is believed. Weaker income and spending isn't very encouraging. 

The House finally passed the payroll tax extension last night. The House plans to clear the bill later today for President Barack Obama’s signature. It would extend a two-percentage-point payroll tax cut, continue expanded unemployment benefits and head off a reduction in Medicare payments to doctors through February. Lawmakers plan to negotiate on a longer-term plan in the new year.

The view that the US economy is gaining momentum is questionable; based on recent reports it looks decent but there are an equal number of recent economic reports that refute the view of improvement. This morning's data were not bell ringers; income and spending lower than expected, durable goods orders without the volatile aircraft industry wasn't that good. Nevertheless, at the moment markets are holding an optimistic outlook, although the view can change quickly.

Nov new home sales at 10:00, expected up 1.9%, were up 1.6% to 315K annualized units. Nov sales the highest since last April, based on sales pace there is a 6 month supply, the lowest since March 2006, the median sales price at $214,000.00. The rate markets ticked a little weaker on the data.