Monday, July 9, 2007
Current Price of FNMA 6.0% Bond: $98.44, +12bp
"Success is how high you bounce when you hit bottom" General George S. Patton. While Mortgage Bonds are bouncing a little higher this morning, further success may be limited as prices are now trading just beneath a tough ceiling at the Falling Resistance Line.
No economic reports of interest are due today - but second quarter earnings season for the stock market kicks off, with earnings reports from Alcoa and Pepsi. Other major corporations reporting this week include Yum! Brands, Genentech, M&T Bank Corporation, Marriott International, and General Electric.
Analysts are predicting a 4.1% growth in earnings from the S&P 500 corporations in the second quarter, down from the first quarter’s 7.9% rate. So if earnings end up surprising to the upside, coming in above the projected 4.1%, stock prices could move higher, adding to their present lofty levels. And if this happens, it could pressure Bond pricing lower, as Stocks and Bonds compete for the same investment dollar. But if earnings disappoint, we could see a correction in the stock market, which could benefit bond prices. We will be keeping an eye on the earnings reports of the major corporations and monitoring how the financial markets react.
The Bond is now nestled up against the Falling Resistance Line, and in order for prices to improve further, the Bond will have to get rough and make a move to break above this tough ceiling. And even if the Bond does overtake this resistance level, the 25-day Moving Average lurks just a bit further overhead, which forced Bonds lower just last week. While an overall bias towards Locking remains prudent, we will carefully Float for now. Bonds are currently higher, so let's give pricing a chance to break through resistance.
"Success is how high you bounce when you hit bottom" General George S. Patton. While Mortgage Bonds are bouncing a little higher this morning, further success may be limited as prices are now trading just beneath a tough ceiling at the Falling Resistance Line.
No economic reports of interest are due today - but second quarter earnings season for the stock market kicks off, with earnings reports from Alcoa and Pepsi. Other major corporations reporting this week include Yum! Brands, Genentech, M&T Bank Corporation, Marriott International, and General Electric.
Analysts are predicting a 4.1% growth in earnings from the S&P 500 corporations in the second quarter, down from the first quarter’s 7.9% rate. So if earnings end up surprising to the upside, coming in above the projected 4.1%, stock prices could move higher, adding to their present lofty levels. And if this happens, it could pressure Bond pricing lower, as Stocks and Bonds compete for the same investment dollar. But if earnings disappoint, we could see a correction in the stock market, which could benefit bond prices. We will be keeping an eye on the earnings reports of the major corporations and monitoring how the financial markets react.
The Bond is now nestled up against the Falling Resistance Line, and in order for prices to improve further, the Bond will have to get rough and make a move to break above this tough ceiling. And even if the Bond does overtake this resistance level, the 25-day Moving Average lurks just a bit further overhead, which forced Bonds lower just last week. While an overall bias towards Locking remains prudent, we will carefully Float for now. Bonds are currently higher, so let's give pricing a chance to break through resistance.
Friday, July 6, 2007
Market Update July 6, 2007
Current Price of FNMA 6.0% Bond: $98.38, -12bp
The June Jobs Report was as we expected, higher than anticipated at 132,000 new jobs being created – and another 75,000 new jobs were added via revisions to April and May. Bonds are moving lower, yet some of the damage was already “cooked in” after yesterday’s ADP report gave hint of a strong Jobs number today.
In other details from the Report, Average Hourly Earnings rose by 0.3% for a 12-month gain of 3.9%, and the Unemployment Rate remains at a low 4.5%. Overall, this report indicates a very healthy labor market – which gives the Fed continued reason to be concerned over “wage-based inflation”. This means that as employees are paid more – they have more money to spend on goods and services, which can drive prices of consumer products higher with the added demand. Additionally – employers that have to continually pay higher wages to their employees may have to raise the prices of their own goods and services, just to help retain their profit margins. This very real concern will keep the idea of a Fed rate cut on the back burner for now.
Technically, Bonds have now been pushed all the way back below the Falling Resistance Line, as we were concerned could happen. One positive note is that Bonds did bounce higher after hitting important support at $98.31 and are now being squeezed between the overhead Falling Resistance Line, and this support level just underfoot. It will be interesting to see who wins this battle – the Bulls or the Bears, especially in light of next week’s slim economic news calendar. The biggest report of interest (Retail Sales) does not arrive until Friday, and with no immediate catalyst to help drive Bond prices higher or help them fight back above the Falling Resistance Line – it appears the tone may be negative for Bonds in the near term.
The June Jobs Report was as we expected, higher than anticipated at 132,000 new jobs being created – and another 75,000 new jobs were added via revisions to April and May. Bonds are moving lower, yet some of the damage was already “cooked in” after yesterday’s ADP report gave hint of a strong Jobs number today.
In other details from the Report, Average Hourly Earnings rose by 0.3% for a 12-month gain of 3.9%, and the Unemployment Rate remains at a low 4.5%. Overall, this report indicates a very healthy labor market – which gives the Fed continued reason to be concerned over “wage-based inflation”. This means that as employees are paid more – they have more money to spend on goods and services, which can drive prices of consumer products higher with the added demand. Additionally – employers that have to continually pay higher wages to their employees may have to raise the prices of their own goods and services, just to help retain their profit margins. This very real concern will keep the idea of a Fed rate cut on the back burner for now.
Technically, Bonds have now been pushed all the way back below the Falling Resistance Line, as we were concerned could happen. One positive note is that Bonds did bounce higher after hitting important support at $98.31 and are now being squeezed between the overhead Falling Resistance Line, and this support level just underfoot. It will be interesting to see who wins this battle – the Bulls or the Bears, especially in light of next week’s slim economic news calendar. The biggest report of interest (Retail Sales) does not arrive until Friday, and with no immediate catalyst to help drive Bond prices higher or help them fight back above the Falling Resistance Line – it appears the tone may be negative for Bonds in the near term.
Thursday, July 5, 2007
Market Update July 5, 2007
Current Price of FNMA 6.0% Bond: $98.66, -25bp
Traders’ ears may have been ringing already after last nights fireworks, but they got another earful this morning as several Bond-unfriendly economic headlines arrived with a bang. Bonds are moving lower, so let’s unpack the details for talking points to use with your clients today.
First, the Bank of England (like our Fed) announced a hike in their benchmark interest rate to 5.75%, their highest rate in six years and .50% above our own Fed Funds Rate of 5.25%. Remember, our own Bonds compete globally for investment dollars seeking the highest rate of return, so higher rates being offered in other countries can pull money out of our Bond market…just like is happening today. In other foreign central bank news, the European Central Bank (ECB) did decide to keep their current benchmark interest rate unchanged for now, but there is speculation the ECB will bump rates higher in September.
Next, the ADP employment report arrived, showing their “private” count of job growth rising by its quickest rate in seven months, with 150,000 new private sector jobs being created during June. Adding an estimated 25,000 for government jobs, this brings their count to 175,000 new jobs created. Tomorrow’s official Jobs Report coming from the Department of Labor has been estimated to arrive at 125,000 new job creations, a good bit below ADP’s count. Although ADP’s number has been notoriously inaccurate in the past, Bond Traders are taking this as a sign that tomorrow’s Report may be stronger than expected, and are selling off in advance of the official release.
Finally, the Institute for Supply Management (ISM) Services Index came in strong, showing the service sector of the economy expanded rapidly in June. Any reading above 50% indicates more service firms are expanding than contracting, and the read came in at 60.7%, up from May’s number and higher than expected. Positive economic news like this generally drives money into Stocks and out of Bonds – so just one more reason Bonds are trading lower so far today.
Traders’ ears may have been ringing already after last nights fireworks, but they got another earful this morning as several Bond-unfriendly economic headlines arrived with a bang. Bonds are moving lower, so let’s unpack the details for talking points to use with your clients today.
First, the Bank of England (like our Fed) announced a hike in their benchmark interest rate to 5.75%, their highest rate in six years and .50% above our own Fed Funds Rate of 5.25%. Remember, our own Bonds compete globally for investment dollars seeking the highest rate of return, so higher rates being offered in other countries can pull money out of our Bond market…just like is happening today. In other foreign central bank news, the European Central Bank (ECB) did decide to keep their current benchmark interest rate unchanged for now, but there is speculation the ECB will bump rates higher in September.
Next, the ADP employment report arrived, showing their “private” count of job growth rising by its quickest rate in seven months, with 150,000 new private sector jobs being created during June. Adding an estimated 25,000 for government jobs, this brings their count to 175,000 new jobs created. Tomorrow’s official Jobs Report coming from the Department of Labor has been estimated to arrive at 125,000 new job creations, a good bit below ADP’s count. Although ADP’s number has been notoriously inaccurate in the past, Bond Traders are taking this as a sign that tomorrow’s Report may be stronger than expected, and are selling off in advance of the official release.
Finally, the Institute for Supply Management (ISM) Services Index came in strong, showing the service sector of the economy expanded rapidly in June. Any reading above 50% indicates more service firms are expanding than contracting, and the read came in at 60.7%, up from May’s number and higher than expected. Positive economic news like this generally drives money into Stocks and out of Bonds – so just one more reason Bonds are trading lower so far today.
Tuesday, July 3, 2007
Market Update July 3, 2007
Current Price of FNMA 6.0% Bond: 99.06, +3bp
Bonds are headed in the right direction – higher, and away from the Falling Resistance Line. But we’re not ready to light up a bottle rocket and celebrate just yet – with some potentially volatile trading days ahead, Bonds still have a ways to go before we’ll consider the move above the tough Falling Resistance Line completely convincing.
There are only two low-level economic reports that arrived today, Factory Orders, which fell by 0.5%, but were better than the decline of 1.2% that analysts had expected. Pending Home Sales – which is a volatile number because it only measures contracts, not closings – fell by 3.5%, underscoring softness in the housing market.
With an early market close for Bonds at 2:00pm ET followed by a full close tomorrow in observance of Independence Day, trading should be light this morning – but that can sometimes lead to volatility.
Bonds are headed in the right direction – higher, and away from the Falling Resistance Line. But we’re not ready to light up a bottle rocket and celebrate just yet – with some potentially volatile trading days ahead, Bonds still have a ways to go before we’ll consider the move above the tough Falling Resistance Line completely convincing.
There are only two low-level economic reports that arrived today, Factory Orders, which fell by 0.5%, but were better than the decline of 1.2% that analysts had expected. Pending Home Sales – which is a volatile number because it only measures contracts, not closings – fell by 3.5%, underscoring softness in the housing market.
With an early market close for Bonds at 2:00pm ET followed by a full close tomorrow in observance of Independence Day, trading should be light this morning – but that can sometimes lead to volatility.
Monday, July 2, 2007
Market Update July 2, 2007
Risks favor: Cautiously Floating
Current Price of FNMA 6.0% Bond: $98.97, +6bp
On the heels of last week’s full slate of economic events, the schedule this week will be fairly tame by comparison…that is, until Friday’s monthly Jobs Report arrives. The labor market has remained incredibly tight, which is one of the reasons the Fed isn’t anxious to declare that inflation is completely controlled just yet – so the report will be of interest, and as always, could be a market mover.
In the meantime, today brought only the Institute of Supply Management (ISM) Index, giving a read on the health of the manufacturing sector. It came in stronger than expected - and actually at the highest level in 14 months. Stocks seem to like the strong news, although Bonds have had little reaction.
The technical picture has been very exciting lately, as Bonds battle out a “squeeze play” between the strong Falling Resistance Line and support just below. For now, Bonds have popped just above the Falling Resistance Line – and while this is good news, we’re not yet convinced that the move is permanent. Although the week ahead lacks a fat economic schedule, the midweek Independence Day holiday can lead to increased volatility due to light trading volume, combined with Trader's nagging fears of terrorist action surrounding our patriotic holidays. For now, we’ll continue to Float, as we watch to see if the Bond can retain its position above the Falling Resistance Line.
Current Price of FNMA 6.0% Bond: $98.97, +6bp
On the heels of last week’s full slate of economic events, the schedule this week will be fairly tame by comparison…that is, until Friday’s monthly Jobs Report arrives. The labor market has remained incredibly tight, which is one of the reasons the Fed isn’t anxious to declare that inflation is completely controlled just yet – so the report will be of interest, and as always, could be a market mover.
In the meantime, today brought only the Institute of Supply Management (ISM) Index, giving a read on the health of the manufacturing sector. It came in stronger than expected - and actually at the highest level in 14 months. Stocks seem to like the strong news, although Bonds have had little reaction.
The technical picture has been very exciting lately, as Bonds battle out a “squeeze play” between the strong Falling Resistance Line and support just below. For now, Bonds have popped just above the Falling Resistance Line – and while this is good news, we’re not yet convinced that the move is permanent. Although the week ahead lacks a fat economic schedule, the midweek Independence Day holiday can lead to increased volatility due to light trading volume, combined with Trader's nagging fears of terrorist action surrounding our patriotic holidays. For now, we’ll continue to Float, as we watch to see if the Bond can retain its position above the Falling Resistance Line.
Friday, June 29, 2007
Market Update June 29, 2007
Risks favor: Cautiously Floating
Current Price of FNMA 6.0% Bond: $98.81, +12bp
Bonds are trading higher on the release of a tame Core Personal Consumption Expenditure (PCE) Index. The Core PCE for May was reported at 0.1%, which matched expectations...but most importantly, lowered the year-over-year Core consumer inflation rate to 1.9% - inside the goalposts of the Fed's desired target zone of 1 to 2%. Very good news for Bonds. However, this morning's advance is being capped by the very strong Falling Resistance Line - take a look at the Bond Page.
This is just on the heels of yesterday's Fed statement - where as expected, they left the Fed Funds Rate unchanged at 5.25%, but stated that although inflation is moderating, they are not yet persuaded that it is fully under control. And the Fed does expect an increase in economic activity - which means they are not likely to make a cut to the Fed Funds Rate in the very near future. This was a bit of a mixed message that took awhile for the market to fully absorb, and Bond prices ultimately finished just slightly lower yesterday. So this morning's news of tame inflation data via the Core PCE was an especially welcome sign. But there is talk that the Fed may also be concerned that the Headline Inflation numbers, which include food and energy, have been a bit higher than desired. This will be a story to keep an eye on.
In other economic headlines, the Chicago Purchasing Manager's Index (PMI) was reported at 60.2, better than expectations of 58.0 and right in line with the Fed's comments on economic activity picking up ahead. Additionally, the Revised University of Michigan Consumer Sentiment Index for June was reported at 85.3, better than expectations of 84.0. Consumers also continue to spend money like they hate it - the Personal Savings Rate dropped even more negative, to stand currently at -1.4%. The stronger than expected economic reports have not put much of a damper on the Bond rally so far today, as Traders are focused on enjoying the friendly read on core consumer inflation.
The “big squeeze” is still on, as Bonds continue to battle the Falling Resistance Line, presently at $98.79. With support below at $98.28, a breakout is pending. Next week's lower than normal holiday Trading volume, coupled with next Friday's Jobs Report might just provide the spark that causes Bond prices to either push above this ceiling or head back down towards support at $98.28.
Current Price of FNMA 6.0% Bond: $98.81, +12bp
Bonds are trading higher on the release of a tame Core Personal Consumption Expenditure (PCE) Index. The Core PCE for May was reported at 0.1%, which matched expectations...but most importantly, lowered the year-over-year Core consumer inflation rate to 1.9% - inside the goalposts of the Fed's desired target zone of 1 to 2%. Very good news for Bonds. However, this morning's advance is being capped by the very strong Falling Resistance Line - take a look at the Bond Page.
This is just on the heels of yesterday's Fed statement - where as expected, they left the Fed Funds Rate unchanged at 5.25%, but stated that although inflation is moderating, they are not yet persuaded that it is fully under control. And the Fed does expect an increase in economic activity - which means they are not likely to make a cut to the Fed Funds Rate in the very near future. This was a bit of a mixed message that took awhile for the market to fully absorb, and Bond prices ultimately finished just slightly lower yesterday. So this morning's news of tame inflation data via the Core PCE was an especially welcome sign. But there is talk that the Fed may also be concerned that the Headline Inflation numbers, which include food and energy, have been a bit higher than desired. This will be a story to keep an eye on.
In other economic headlines, the Chicago Purchasing Manager's Index (PMI) was reported at 60.2, better than expectations of 58.0 and right in line with the Fed's comments on economic activity picking up ahead. Additionally, the Revised University of Michigan Consumer Sentiment Index for June was reported at 85.3, better than expectations of 84.0. Consumers also continue to spend money like they hate it - the Personal Savings Rate dropped even more negative, to stand currently at -1.4%. The stronger than expected economic reports have not put much of a damper on the Bond rally so far today, as Traders are focused on enjoying the friendly read on core consumer inflation.
The “big squeeze” is still on, as Bonds continue to battle the Falling Resistance Line, presently at $98.79. With support below at $98.28, a breakout is pending. Next week's lower than normal holiday Trading volume, coupled with next Friday's Jobs Report might just provide the spark that causes Bond prices to either push above this ceiling or head back down towards support at $98.28.
Thursday, June 28, 2007
Market Update June 28, 2007
Current Price of FNMA 6.0% Bond: $98.78, -3bp
The market is rolling along this morning, singing..."I'm not waiting on a lady, I'm just waiting on the Fed". Yep, just like that classic Stones tune, the market is on the edge of its seat, waiting on the Fed statement to arrive at 2:15pm ET this afternoon, and hoping it brings a friendly word on inflation.
In this morning's news, First Quarter GDP was finalized at 0.7%, below expectations of a final 0.8% read. So while First quarter did finish somewhat weakly, we are expecting that Second Quarter will come in a bit stronger. On the labor scene, Initial Jobless Claims was reported at 313,000, in line with expectations and suggesting the labor market remains tight. But today - we are just waiting on the Fed.
The Fed announcement this afternoon should be very interesting. While there is no chance the Fed will change the current Fed Funds rate of 5.25% last set on June 29, 2006, the market will be carefully analyzing the wording that the Fed uses to describe its present view on inflation and monetary policy. Stocks and Bonds alike would enjoy hearing some soothing words about inflation, and will be hoping to read between the lines as to signs of a rate cut by the Fed, and when it might happen. If Traders believe the Policy Statement signals the possibility for a rate cut anytime in the near future, we could see a nice rally to the upside in bond prices. But should the Fed's words indicate a continued concern about inflation, Bond prices will likely move lower in response.
Technically, the squeeze is on...as Bonds currently trade between a Falling Resistance Line overhead, presently at $98.82 and a floor of support at $98.28. This afternoon's Fed meeting may determine the Bond's next move in the squeeze play - so stay tuned as we all wait on the Fed.
The market is rolling along this morning, singing..."I'm not waiting on a lady, I'm just waiting on the Fed". Yep, just like that classic Stones tune, the market is on the edge of its seat, waiting on the Fed statement to arrive at 2:15pm ET this afternoon, and hoping it brings a friendly word on inflation.
In this morning's news, First Quarter GDP was finalized at 0.7%, below expectations of a final 0.8% read. So while First quarter did finish somewhat weakly, we are expecting that Second Quarter will come in a bit stronger. On the labor scene, Initial Jobless Claims was reported at 313,000, in line with expectations and suggesting the labor market remains tight. But today - we are just waiting on the Fed.
The Fed announcement this afternoon should be very interesting. While there is no chance the Fed will change the current Fed Funds rate of 5.25% last set on June 29, 2006, the market will be carefully analyzing the wording that the Fed uses to describe its present view on inflation and monetary policy. Stocks and Bonds alike would enjoy hearing some soothing words about inflation, and will be hoping to read between the lines as to signs of a rate cut by the Fed, and when it might happen. If Traders believe the Policy Statement signals the possibility for a rate cut anytime in the near future, we could see a nice rally to the upside in bond prices. But should the Fed's words indicate a continued concern about inflation, Bond prices will likely move lower in response.
Technically, the squeeze is on...as Bonds currently trade between a Falling Resistance Line overhead, presently at $98.82 and a floor of support at $98.28. This afternoon's Fed meeting may determine the Bond's next move in the squeeze play - so stay tuned as we all wait on the Fed.
Great Jib-Jab Star Spangled Banner
This video is sung by many of our presidents. I think a great tribute to our upcoming National Holiday.
Wednesday, June 27, 2007
Market Update June 27, 2007
Current Price of FNMA 6.0% Bond: $98.88, +12bp
A weaker than expected Durable Goods Orders report is giving Bonds a boost so far this morning. Durable Goods Orders fell by a greater than expected 2.8% during May, as business orders for big ticket items declined. This was the lowest reading since January, and indicates that businesses are making fewer purchases for things like equipment, machinery, and especially for aircraft orders. This weak report was good news for Bonds, as these lower spending levels may help keep inflation moving lower as well.
At 1:00pm ET, the market will be delivered some additional Bond supply by way of a Treasury auction of $13 Billion in Five-year Notes. Added supply always has the potential of having an impact on Bond prices - but even bigger news items are just ahead, with the Fed Policy Statement arriving tomorrow at 2:15pm ET and the important Personal Consumption Expenditure (PCE) number arriving Friday.
Take a look at the Bond chart below to see that Bond prices "gapped open", or opened higher than yesterday's highest trading prices. This is a positive technical signal. But before we start popping the champagne corks, bear in mind that it is a long trading day ahead, and things could change very quickly; the market has been extremely volatile over the past couple of months. For now, we'll advise Cautiously Floating, as we wait to see what the Fed has to say tomorrow on inflation, the economy and the outlook for monetary policy.
A weaker than expected Durable Goods Orders report is giving Bonds a boost so far this morning. Durable Goods Orders fell by a greater than expected 2.8% during May, as business orders for big ticket items declined. This was the lowest reading since January, and indicates that businesses are making fewer purchases for things like equipment, machinery, and especially for aircraft orders. This weak report was good news for Bonds, as these lower spending levels may help keep inflation moving lower as well.
At 1:00pm ET, the market will be delivered some additional Bond supply by way of a Treasury auction of $13 Billion in Five-year Notes. Added supply always has the potential of having an impact on Bond prices - but even bigger news items are just ahead, with the Fed Policy Statement arriving tomorrow at 2:15pm ET and the important Personal Consumption Expenditure (PCE) number arriving Friday.
Take a look at the Bond chart below to see that Bond prices "gapped open", or opened higher than yesterday's highest trading prices. This is a positive technical signal. But before we start popping the champagne corks, bear in mind that it is a long trading day ahead, and things could change very quickly; the market has been extremely volatile over the past couple of months. For now, we'll advise Cautiously Floating, as we wait to see what the Fed has to say tomorrow on inflation, the economy and the outlook for monetary policy.
Tuesday, June 26, 2007
Market Update June 26, 2007
Current Price of FNMA 6.0% Bond: $98.81, +3bp
Just like any major league baseball player caught in a "squeeze play" between third base and home, Bonds are heading right into a squeeze play of their own.
Just take one look at the Bond Page and you can see it...Bonds are right between a Falling Resistance Line overhead, currently at $98.88 and falling everyday, and a floor of support below at $98.28. You can also see how the Falling Resistance Line has been tested but not yet defeated, so Bonds will need a strong catalyst if they are going to be able to break higher above this ceiling as the squeeze play tightens in the next few trading sessions. With a week full of news - the catalyst could come any day, but the technical squeeze certainly heightens the anticipation for the upcoming Fed Meeting and PCE Report set for release on Thursday and Friday.
New Home Sales for May were reported at 915,000 units, slightly lower than expectations of 925,000 - plus the report brought a downward revision for April's numbers as well. Inventory remained relatively stable at a 7.1 month supply, well off the recent highs of 8.3 months. Although the report was somewhat weak overall, the even inventory pace suggests further stabilization in the Housing market.
Just like any major league baseball player caught in a "squeeze play" between third base and home, Bonds are heading right into a squeeze play of their own.
Just take one look at the Bond Page and you can see it...Bonds are right between a Falling Resistance Line overhead, currently at $98.88 and falling everyday, and a floor of support below at $98.28. You can also see how the Falling Resistance Line has been tested but not yet defeated, so Bonds will need a strong catalyst if they are going to be able to break higher above this ceiling as the squeeze play tightens in the next few trading sessions. With a week full of news - the catalyst could come any day, but the technical squeeze certainly heightens the anticipation for the upcoming Fed Meeting and PCE Report set for release on Thursday and Friday.
New Home Sales for May were reported at 915,000 units, slightly lower than expectations of 925,000 - plus the report brought a downward revision for April's numbers as well. Inventory remained relatively stable at a 7.1 month supply, well off the recent highs of 8.3 months. Although the report was somewhat weak overall, the even inventory pace suggests further stabilization in the Housing market.
Monday, June 25, 2007
Market Update June 25, 2007
Current Price of FNMA 6.0% Bond: $98.78, +16bp
Mortgage Bonds are trading nicely higher this morning, following up on Friday's successful bounce on the $98.28 floor of support.
While last week was all about technicals - this week the economic news will return to center stage for driving market action, kicking off with a look at the housing sector this morning. Existing Home Sales during May of 5.99 Million units were slightly stronger than the 5.90 Million that economists had expected - but the inventory of homes on the market rose by 5%, currently representing an 8.9 month supply. Lawrence Yun, economist for NAR said that although housing is still correcting, he said the fundamentals such as strong job creations, economic growth, favorable mortgage rates and flat home prices are all positives for the outlook ahead.
And the calendar will get even more intense from here, with potentially market moving releases every day this week, including the Fed Policy Statement on Thursday and the Fed's favored measure of inflation, the Core Personal Consumption Expenditure (PCE) number, arriving the very next day on Friday.
For now, Bond prices are moving higher, but fast approaching a tough layer of overhead resistance at the Falling Resistance Line and Falling Window. We will continue to carefully float for now, but with the week's strong calendar of economic news in store, the volatile ride Bonds have been on lately may not be over just yet.
Mortgage Bonds are trading nicely higher this morning, following up on Friday's successful bounce on the $98.28 floor of support.
While last week was all about technicals - this week the economic news will return to center stage for driving market action, kicking off with a look at the housing sector this morning. Existing Home Sales during May of 5.99 Million units were slightly stronger than the 5.90 Million that economists had expected - but the inventory of homes on the market rose by 5%, currently representing an 8.9 month supply. Lawrence Yun, economist for NAR said that although housing is still correcting, he said the fundamentals such as strong job creations, economic growth, favorable mortgage rates and flat home prices are all positives for the outlook ahead.
And the calendar will get even more intense from here, with potentially market moving releases every day this week, including the Fed Policy Statement on Thursday and the Fed's favored measure of inflation, the Core Personal Consumption Expenditure (PCE) number, arriving the very next day on Friday.
For now, Bond prices are moving higher, but fast approaching a tough layer of overhead resistance at the Falling Resistance Line and Falling Window. We will continue to carefully float for now, but with the week's strong calendar of economic news in store, the volatile ride Bonds have been on lately may not be over just yet.
Friday, June 22, 2007
APR Can Be Deceiving
A borrower who is shopping for the best mortgage rate can easily be seduced by low rate offers that are accompanied by low Annual Percentage Rates (APR). Federal Law requires that APR be disclosed along side the actual interest rate…this is in order to help borrowers make a more informed decision on their mortgage. The truth is that APR is a very poor way to comparison shop for a mortgage and can cause borrowers to make costly wrong decisions.
APR was created in order to provide a way for borrowers to account for costs associated with the mortgage. This sounds good because it may not be very easy to choose between a loan with a lower rate and higher fees or a loan at a higher rate and low fees. The problem is that the APR calculation makes some very bad assumptions. First, APR assumes zero inflation and that the value or buying power of a Dollar today will be exactly equal to the value of a Dollar 10, 20 even 30 years from now. Next, the APR calculation assumes that the mortgage will never be prepaid or paid off. That means no refinancing or selling the home…highly unlikely since the average life of a home mortgage loan is less than four years. Just think, about your own clients. Is it not rare to see the same loan in place for even 5-years…forget 30-years. The APR calculation does not consider the value of the money used for fees. So if you spent thousands of dollars in points or fees to get a lower rate, the APR calculation does not give any value to the money if it were not spent on closing costs. Finally, APR does not take tax consequences into consideration. This can be significant since higher fees on the mortgage may not be deductible while the higher interest rate typically is deductible. Moreover, APR can be manipulated, making it totally worthless.
So how does APR work anyway? I like to explain it to my clients by using triangles. I often draw two sets of triangle for my clients to illustrate the difference between Interest Rate and APR. The reason for the triangle is because there are 3 sources of input…"Interest Rate", "Mortgage Amount" and "Monthly Payment". If you know any two of the three, you can calculate the third. See the triangle below.
Since any two of the three variables allows you to calculate the third, a $911 monthly payment for a $150,000 mortgage calculates to an interest rate of 6.125%. But the APR calculation uses different information. The APR calculation only keeps the "Monthly Payment" information the same. Instead of the "Mortgage Amount", APR uses "Amount Financed". This is the "Amount Financed" information on the Truth in Lending statement. Amount Financed takes into consideration the fees that are lender imposed. This includes application fees, points, commitment fees…and interim or per diem interest. So, Amount Financed is the mortgage amount less any lender fees, points and interim interest. The more fees, the lower the Amount Financed. The monthly payment is then calculated as a product of the Amount Financed to give you the "Annual Percentage Rate" or "APR". So the lower the "Amount Financed", the higher the "APR" is. Amount Financed can be manipulated by assuming a closing on the last day instead of the first day of the month. That would increase the Amount Financed and decrease the APR.
Here is a real example on a $150,000 fixed rate 30-year mortgage with zero points: Lender "A" (triangle above) is offering a great low rate of 5.875% and lender "B" (triangle below) is offering a higher rate of 6.125%.
A closer look shows that Lender "A" is charging $3,000 more in fees than Lender "B". How do you compare? If you look at APR, Lender "A" (5.875% with $3,000 higher fees) has an APR of 6.149%. Lender "B" (6.125% but a $3,000 savings in fees) has an APR of 6.211%. So according the APR, Lender A is a better deal even though the fees are $3,000 higher…this is exactly what these high fee lenders are hoping you look at.
Let's look at the real story. The payment difference between the two is $24 per month. So is it worth paying $3,000 in fees to Lender A in order to save $24 per month? Hardly. It will take 10.5 years for a borrower to just to get back their investment! A bad choice when you consider that mortgage loans typically are retired within four years. To make the decision to go with Lender "A" even worse, if that's possible, borrowers rarely take the value of today's dollars into account. Rather than giving Lender "A" the windfall of your hard earned $3,000, you should give it to yourself. Reduce the loan balance on your mortgage by the fees you are saving. In the example above that would reduce the loan from $150,000 to $147,000. This makes the payment difference just $6 per month instead of $24 per month! The true time to break even is really 500 months (more than 40-years!). So it is impossible to benefit from the higher fee program from Lender "A" because the maximum period on the loan is 30 years or 360 months. One more thing…when you calculate your tax deduction on the payment difference, it makes even more sense to avoid paying higher non deductible fees. The obvious correct choice is to go with Lender "B" even though the APR is lower with Lender "A".
Market Update June 22, 2007
Current Price of FNMA 6.0% Bond: $98.38, -3bp
Mortgage Bonds are trading slightly lower and have improved from the worst levels of the day as prices approached the nearest support level, located at $98.28. There are no economic reports today to influence pricing, so Mortgage Bonds will likely trade between support and resistance.
Next week is going to be very exciting with a full plate of high-impact economic reports. Existing Home Sales is scheduled to be released on Monday. New Home Sales and the latest read on Consumer Confidence are set for release on Tuesday. Wednesday brings Durable Goods Orders, but the real action begins Thursday with the Fed’s Monetary Policy Statement and interest rate decision. There is no chance of a Fed rate change next week, but it will be very interesting to hear the Fed's take on core consumer inflation, which appears to be moderating as forecasted.
Speaking of inflation, next Friday the week gets capped off with a potential market blockbuster, the Core Personal Consumption Expenditure Price Index (PCE) – the Fed’s favorite gauge of consumer inflation. At the moment, economists are forecasting the year over year Core PCE to be reported at 1.9%, which would show further moderation of core consumer inflation. This would be good news for Bonds.
After peaking on Tuesday, prices continued to drift lower under the Falling Resistance Line until touching down exactly on the floor of support at $98.28 this morning. Let's see if Bonds can bounce a bit higher from here. Should prices break below the current floor, there is real strong support at the $97.84 level
Mortgage Bonds are trading slightly lower and have improved from the worst levels of the day as prices approached the nearest support level, located at $98.28. There are no economic reports today to influence pricing, so Mortgage Bonds will likely trade between support and resistance.
Next week is going to be very exciting with a full plate of high-impact economic reports. Existing Home Sales is scheduled to be released on Monday. New Home Sales and the latest read on Consumer Confidence are set for release on Tuesday. Wednesday brings Durable Goods Orders, but the real action begins Thursday with the Fed’s Monetary Policy Statement and interest rate decision. There is no chance of a Fed rate change next week, but it will be very interesting to hear the Fed's take on core consumer inflation, which appears to be moderating as forecasted.
Speaking of inflation, next Friday the week gets capped off with a potential market blockbuster, the Core Personal Consumption Expenditure Price Index (PCE) – the Fed’s favorite gauge of consumer inflation. At the moment, economists are forecasting the year over year Core PCE to be reported at 1.9%, which would show further moderation of core consumer inflation. This would be good news for Bonds.
After peaking on Tuesday, prices continued to drift lower under the Falling Resistance Line until touching down exactly on the floor of support at $98.28 this morning. Let's see if Bonds can bounce a bit higher from here. Should prices break below the current floor, there is real strong support at the $97.84 level
Thursday, June 21, 2007
Market Update June 21, 2007
Current Price of FNMA 6.0% Bond: $98.59, Unchanged
With the extremely high level of volatility we've seen lately, it sure is clear how important it is to stay dialed in to what the market is doing and why. In just the past 24 hours, we have seen the Bond shift from positive momentum to negative momentum rather quickly. In fact, just this morning we have seen prices move from up 6bp on the day, to down 12bp, back higher to be unchanged on the day in just one trading hour - now that's volatility!
So as we ride through the volatility, it's important to understand all the factors causing the change - and with a light news week continuing, technicals continue to play a huge role. In yesterday's update we discussed the Falling Resistance Line, and how the overall trend for Bond pricing remains lower. Seeing Bond prices fall back after approaching resistance yesterday was not a good technical sign, and could lead to a continued move lower.
Here's another very interesting factor playing into the current weakness of Bonds - Corporate Bond Issues. What the heck does a company selling their own Corporate Bonds have to do with Mortgage Bonds? Here's the story. Companies will from time to time issue debt against their company, as a way to raise capital without giving away stock ownership. But as they prepare to do so, they see that if rates are continuing to move higher, the price they will get for their Corporate Bonds will be lower. So just before they issue their Corporate Bonds, they "hedge" against upward swings in interest rates by shorting other Bonds, like Treasuries. This protects the companies from a sudden move higher in rates, as if rates were to move higher, the companies would likely have to pay more interest on their new corporate issues to meet current market conditions...but at the same time make money on the selling of the Treasuries - thereby "hedging" their actions.
This shorting or selling of Treasury Bonds temporarily drives prices lower in the entire Bond market - including Mortgage Bonds. But when the Corporate Bonds are actually priced and issued, this "hedge" trading is reversed, with the Treasuries being bought back, providing a subsequent boost to the Bond market in the other direction. These hedging activities can create abrupt volatility in the Bond market and this was likely a contributor to the volatility both yesterday and so far today.
For now, the Bond looks poised to move lower and test a floor of support at the $98.28 level, about 30bp lower than present levels. With no high-impact reports due until next week and the technicals turning negative, a bias towards Locking appears prudent at this time.
With the extremely high level of volatility we've seen lately, it sure is clear how important it is to stay dialed in to what the market is doing and why. In just the past 24 hours, we have seen the Bond shift from positive momentum to negative momentum rather quickly. In fact, just this morning we have seen prices move from up 6bp on the day, to down 12bp, back higher to be unchanged on the day in just one trading hour - now that's volatility!
So as we ride through the volatility, it's important to understand all the factors causing the change - and with a light news week continuing, technicals continue to play a huge role. In yesterday's update we discussed the Falling Resistance Line, and how the overall trend for Bond pricing remains lower. Seeing Bond prices fall back after approaching resistance yesterday was not a good technical sign, and could lead to a continued move lower.
Here's another very interesting factor playing into the current weakness of Bonds - Corporate Bond Issues. What the heck does a company selling their own Corporate Bonds have to do with Mortgage Bonds? Here's the story. Companies will from time to time issue debt against their company, as a way to raise capital without giving away stock ownership. But as they prepare to do so, they see that if rates are continuing to move higher, the price they will get for their Corporate Bonds will be lower. So just before they issue their Corporate Bonds, they "hedge" against upward swings in interest rates by shorting other Bonds, like Treasuries. This protects the companies from a sudden move higher in rates, as if rates were to move higher, the companies would likely have to pay more interest on their new corporate issues to meet current market conditions...but at the same time make money on the selling of the Treasuries - thereby "hedging" their actions.
This shorting or selling of Treasury Bonds temporarily drives prices lower in the entire Bond market - including Mortgage Bonds. But when the Corporate Bonds are actually priced and issued, this "hedge" trading is reversed, with the Treasuries being bought back, providing a subsequent boost to the Bond market in the other direction. These hedging activities can create abrupt volatility in the Bond market and this was likely a contributor to the volatility both yesterday and so far today.
For now, the Bond looks poised to move lower and test a floor of support at the $98.28 level, about 30bp lower than present levels. With no high-impact reports due until next week and the technicals turning negative, a bias towards Locking appears prudent at this time.
Wednesday, June 20, 2007
Market Update June 20, 2007
Current Price of FNMA 6.0% Bond: $98.81, -19bp
"If you don't know where you're going, chances are you will end up somewhere else" - Yogi Berra. And Mortgage Bonds look like they don't know which direction to go so far this morning. After a healthy Bond rally which started last Wednesday, Traders appear to be taking some profits, pushing prices lower this morning.
And with no scheduled economic news to help provide market direction, pricing will be driven by technical factors. One look at the Bond Page shows some formidable ceilings of resistance, which will make it more difficult for this rally to continue. Notice the Falling Resistance Trendline, which is why the trend direction remains lower, even after the recent rally. Additionally, the 25-day Moving Average, as well as the Falling Window discussed yesterday, are both very tough barriers.
With pricing improving 125bp in the past week, we don't want to give up any of those gains, but at the same time we want to wait and see if the Bond can reverse higher today - just like it has three of the past six days. For the moment, we are advising Floating because most of this morning's losses occurred before rate sheets came out, and so far has only resulted in a partial giveback of yesterday's rally.
"If you don't know where you're going, chances are you will end up somewhere else" - Yogi Berra. And Mortgage Bonds look like they don't know which direction to go so far this morning. After a healthy Bond rally which started last Wednesday, Traders appear to be taking some profits, pushing prices lower this morning.
And with no scheduled economic news to help provide market direction, pricing will be driven by technical factors. One look at the Bond Page shows some formidable ceilings of resistance, which will make it more difficult for this rally to continue. Notice the Falling Resistance Trendline, which is why the trend direction remains lower, even after the recent rally. Additionally, the 25-day Moving Average, as well as the Falling Window discussed yesterday, are both very tough barriers.
With pricing improving 125bp in the past week, we don't want to give up any of those gains, but at the same time we want to wait and see if the Bond can reverse higher today - just like it has three of the past six days. For the moment, we are advising Floating because most of this morning's losses occurred before rate sheets came out, and so far has only resulted in a partial giveback of yesterday's rally.
Tuesday, June 19, 2007
Market Update June 19, 2007
Current Price of FNMA 6.0% Bond: $98.84, +9bp
Mortgage Bonds are trading higher thanks in part to a Housing Starts and Permits Report which met economist's expectations. Overall, the Report for May showed that while new housing demand is slower, the market is stabilizing.
Since this will be a slow economic news week, the technicals will play a more prominent role - and from that standpoint, Mortgage Bonds are presently looking pretty good. Take a look at the Bond Page, and you can clearly see that after testing the long-term support we identified at the $97.84 level last Wednesday, prices have now muscled their way over 100bp higher. Bonds also benefited from a Positive Stochastic Crossover, which indicates that Bonds had become "oversold", and were due for a move higher.
At the moment, the next clear ceiling of resistance is located at the “Falling Window” created on June 6 -7.
Mortgage Bonds are trading higher thanks in part to a Housing Starts and Permits Report which met economist's expectations. Overall, the Report for May showed that while new housing demand is slower, the market is stabilizing.
Since this will be a slow economic news week, the technicals will play a more prominent role - and from that standpoint, Mortgage Bonds are presently looking pretty good. Take a look at the Bond Page, and you can clearly see that after testing the long-term support we identified at the $97.84 level last Wednesday, prices have now muscled their way over 100bp higher. Bonds also benefited from a Positive Stochastic Crossover, which indicates that Bonds had become "oversold", and were due for a move higher.
At the moment, the next clear ceiling of resistance is located at the “Falling Window” created on June 6 -7.
Monday, June 18, 2007
Market Update - June 18, 2007
Current Price of FNMA 6.0% Bond: $98.59, -9bp
Mortgage Bonds are trading slightly lower, but off of the best levels of the day.
At 1:00pm ET, the National Association of Home Builders will release the Housing Market Index for June. The report measures housing market conditions by surveying buyer traffic through model homes, expectations for sales during the next six months, and builders’ sentiment on current sales. Lately, builder sentiment has trended lower and weakened with readings of 36 in March, 33 in April, and 30 in May. A reading below 50 indicates more builders view conditions as poor rather than good. Should this report come in a little weak, Mortgage Bonds may benefit. Tomorrow, a further view on the health of the Housing Sector takes place with the release of the Housing Starts and Building Permits report for May.
After bouncing 100 basis points higher since last Wednesday, Mortgage Bonds appear to be taking a breather. We want to be patient and see if Mortgage Bonds can shrug off the early morning losses, but if prices are unable to recover you might be hearing from us later today as we are seeing the early makings of a Bearish Dark Cloud Cover Pattern.
Mortgage Bonds are trading slightly lower, but off of the best levels of the day.
At 1:00pm ET, the National Association of Home Builders will release the Housing Market Index for June. The report measures housing market conditions by surveying buyer traffic through model homes, expectations for sales during the next six months, and builders’ sentiment on current sales. Lately, builder sentiment has trended lower and weakened with readings of 36 in March, 33 in April, and 30 in May. A reading below 50 indicates more builders view conditions as poor rather than good. Should this report come in a little weak, Mortgage Bonds may benefit. Tomorrow, a further view on the health of the Housing Sector takes place with the release of the Housing Starts and Building Permits report for May.
After bouncing 100 basis points higher since last Wednesday, Mortgage Bonds appear to be taking a breather. We want to be patient and see if Mortgage Bonds can shrug off the early morning losses, but if prices are unable to recover you might be hearing from us later today as we are seeing the early makings of a Bearish Dark Cloud Cover Pattern.
Friday, June 15, 2007
Maret Update June 15, 2997
Current Price of FNMA 6.0% Bond: $98 .62, +28bp
Mortgage Bonds are rallying sharply higher this morning. The reversal from the floor we had identified is continuing in full form, and adding even more favorable technical signals by way of a positive stochastic crossover.
Giving Mortgage Bonds some additional help, is the tame read on Core Consumer Inflation. The Core Consumer Price Index (CPI) for May was reported today at 0.1%, which was lower than expectations of 0.2%. Additionally, the year-over-year Core CPI dropped to 2.2%, which is the lowest read in more than a year, and is moving closer to the Fed's target zone for Core Inflation of 1 - 2%. Since inflation erodes the buying power or value of the fixed return that a Bond provides, the news of inflation moving lower is very good news for the Bond market.
And the tame inflation reading is even helping Stocks. In recent days, Stocks had been selling off on the fear that interest rates were going to rise - which could hurt Stocks, as higher rates make it more expensive for businesses to "do business". But after seeing this morning's tame Consumer Inflation read, Stock traders started buying with both fists, driving Stock prices higher this morning as well. Maybe stock traders are seeing a peak in interest rates too. Where's Bill Gross?
Aside from the big headline news of the Consumer Price Index, there were a few other reports released, but their importance and impact paled in comparison to the welcome read on lower inflation.
David Kosmecki
http://www.americanstar.com
Mortgage Bonds are rallying sharply higher this morning. The reversal from the floor we had identified is continuing in full form, and adding even more favorable technical signals by way of a positive stochastic crossover.
Giving Mortgage Bonds some additional help, is the tame read on Core Consumer Inflation. The Core Consumer Price Index (CPI) for May was reported today at 0.1%, which was lower than expectations of 0.2%. Additionally, the year-over-year Core CPI dropped to 2.2%, which is the lowest read in more than a year, and is moving closer to the Fed's target zone for Core Inflation of 1 - 2%. Since inflation erodes the buying power or value of the fixed return that a Bond provides, the news of inflation moving lower is very good news for the Bond market.
And the tame inflation reading is even helping Stocks. In recent days, Stocks had been selling off on the fear that interest rates were going to rise - which could hurt Stocks, as higher rates make it more expensive for businesses to "do business". But after seeing this morning's tame Consumer Inflation read, Stock traders started buying with both fists, driving Stock prices higher this morning as well. Maybe stock traders are seeing a peak in interest rates too. Where's Bill Gross?
Aside from the big headline news of the Consumer Price Index, there were a few other reports released, but their importance and impact paled in comparison to the welcome read on lower inflation.
David Kosmecki
http://www.americanstar.com
Thursday, June 14, 2007
Mortgage Insurance
In this video I explain what is mortgage insurance, what it's for and how and why some people will try to avoid it.
Dave Kosmecki - AmStar Mortgage
http://www.americanstar.com/
You can subscribe to my Youtube channel at: http://www.youtube.com/1211dave
Dave Kosmecki - AmStar Mortgage
http://www.americanstar.com/
You can subscribe to my Youtube channel at: http://www.youtube.com/1211dave
Market Update June 14, 2007
Current Price of FNMA 6.0% Bond: $98.28, Unchanged
Mortgage Bonds are backing up yesterday's rally with an impressive recovery today. Prices traded down as much as 16bp earlier in the day, but have since rebounded and made back all of the earlier losses.
Initial Jobless Claims were reported in line with expectations at 311,000 showing the labor market remains stable. The Producer Price Index (PPI) was reported at 0.9%, which was hotter than expectations of 0.6%. However, the Core PPI, which strips out volatile food and energy prices, matched consensus estimates with a 0.2% gain. The overall PPI has climbed 4.1% higher over the past 12 months, but the Core PPI has risen by just 1.6% over the same period. Overall, the year over year Core rate of PPI appears to be an encouraging sign that inflation is moderating on the wholesale level. The market initially reacted a bit negatively to this report, but has since shrugged it off and awaits tomorrow's more closely watched Core Consumer Price Index (CPI). Economists are expecting the Core CPI to be reported at 0.2% for the month of May.
This morning's Bond price reversal higher from the worst levels of the day is a very encouraging sign on the heels of yesterday's rally. We feel that tomorrow's CPI will likely be inline with expectations, which would help Bond prices further stabilize and move even higher.
As you know, we made a major position change yesterday from locking to floating. We are calling for a bottom at the floor we have identified at $97.84. We expect prices to improve further from here and gain momentum from a positive stochastic crossover.
David Kosmecki - AmStar Mortgage
http://www.americanstar.com
Mortgage Bonds are backing up yesterday's rally with an impressive recovery today. Prices traded down as much as 16bp earlier in the day, but have since rebounded and made back all of the earlier losses.
Initial Jobless Claims were reported in line with expectations at 311,000 showing the labor market remains stable. The Producer Price Index (PPI) was reported at 0.9%, which was hotter than expectations of 0.6%. However, the Core PPI, which strips out volatile food and energy prices, matched consensus estimates with a 0.2% gain. The overall PPI has climbed 4.1% higher over the past 12 months, but the Core PPI has risen by just 1.6% over the same period. Overall, the year over year Core rate of PPI appears to be an encouraging sign that inflation is moderating on the wholesale level. The market initially reacted a bit negatively to this report, but has since shrugged it off and awaits tomorrow's more closely watched Core Consumer Price Index (CPI). Economists are expecting the Core CPI to be reported at 0.2% for the month of May.
This morning's Bond price reversal higher from the worst levels of the day is a very encouraging sign on the heels of yesterday's rally. We feel that tomorrow's CPI will likely be inline with expectations, which would help Bond prices further stabilize and move even higher.
As you know, we made a major position change yesterday from locking to floating. We are calling for a bottom at the floor we have identified at $97.84. We expect prices to improve further from here and gain momentum from a positive stochastic crossover.
David Kosmecki - AmStar Mortgage
http://www.americanstar.com
Wednesday, June 13, 2007
Market Update June 13, 2007
Below is an update of the Bond Market today and what it is causing in the mortgage market
Current Price of FNMA 6.0% Bond: $98.09, +9bp
Prices may have finally found a bottom! Back on May 15th, we issued a very important lock alert as prices broke below their critical 200-day MA floor of support. We have often discussed the importance of this floor and how prices had only crossed the 200-day MA twice in over two years. The crossing of the 200-day MA has represented a major change in market sentiment in the past, and last month's break below it was no exception. Since breaking under this floor, prices have now declined by 274bp as of the lows hit this morning! Congratulations to you and your clients for avoiding this debacle.
But we are now finally turning optimistic on bonds!!! Is it because Bill Gross just went bearish? No. It is because the long term floor of support has finally been hit and appears to look as if it may hold and support prices. Mortgage Bonds are showing the early makings of a reversal after opening lower and trading beneath the important long-term support level we had identified to you at $97.84. The Bulls quickly recovered and pushed prices higher and back above this critical floor. Why is $97.84 such a significant floor of support? The Bond's rally last Summer started when prices hit this level back on June 26, 2006. Prior to that, $97.84 also represented a support level dating back to May 2002! This proven strength of support is why we had faith in it's ability to hold prices and stop the bleeding.
Traders appear to be betting on this floor supporting prices, as even a much hotter than expected Retail Sales this morning couldn't pressure prices lower. May Retail Sales soared 1.4% higher, far above consensus estimates of 0.6%, while recording the largest gain over the past 16 months. And seeing the Bond reverse convincingly higher in the face of strong economic news is yet another good sign.
Let's closely watch how the trading day unfolds, but we feel prices will improve. And if the Bond can hold its gains, the start of an improving price trend should be ahead.
Current Price of FNMA 6.0% Bond: $98.09, +9bp
Prices may have finally found a bottom! Back on May 15th, we issued a very important lock alert as prices broke below their critical 200-day MA floor of support. We have often discussed the importance of this floor and how prices had only crossed the 200-day MA twice in over two years. The crossing of the 200-day MA has represented a major change in market sentiment in the past, and last month's break below it was no exception. Since breaking under this floor, prices have now declined by 274bp as of the lows hit this morning! Congratulations to you and your clients for avoiding this debacle.
But we are now finally turning optimistic on bonds!!! Is it because Bill Gross just went bearish? No. It is because the long term floor of support has finally been hit and appears to look as if it may hold and support prices. Mortgage Bonds are showing the early makings of a reversal after opening lower and trading beneath the important long-term support level we had identified to you at $97.84. The Bulls quickly recovered and pushed prices higher and back above this critical floor. Why is $97.84 such a significant floor of support? The Bond's rally last Summer started when prices hit this level back on June 26, 2006. Prior to that, $97.84 also represented a support level dating back to May 2002! This proven strength of support is why we had faith in it's ability to hold prices and stop the bleeding.
Traders appear to be betting on this floor supporting prices, as even a much hotter than expected Retail Sales this morning couldn't pressure prices lower. May Retail Sales soared 1.4% higher, far above consensus estimates of 0.6%, while recording the largest gain over the past 16 months. And seeing the Bond reverse convincingly higher in the face of strong economic news is yet another good sign.
Let's closely watch how the trading day unfolds, but we feel prices will improve. And if the Bond can hold its gains, the start of an improving price trend should be ahead.
Tuesday, June 12, 2007
Market Update June 12, 2007
Current Price of FNMA 6.0% Bond: $98.28, -34bp
Unfortunately, the Bond is trading lower again this morning. Foreign investors continue to lighten up their holdings of US Dollar denominated assets like US Treasuries and Mortgage Bonds, as global inflation and the fear of foreign Central Bank rate hikes remains the story. Prices have now dipped below their low levels of June 8th, when they began a recovery after a two-day dive.
Here's another very important story to follow - There has been increased talk in the trading pits about Asian investors, particularly those in China and Japan, buying fewer US bonds. If these countries buy less of our Bonds, it would be harder for pricing to improve as they have been huge supporters of our Bonds in the past. Japan and China are the two top foreign purchasers of Mortgage Bonds. We will get to gauge the foreign appetite for our Bonds as the US Treasury auctions $8 Billion in 10-Year Notes at 1pm ET.
Former Fed Chairman and present Pimco Bond Funds consultant, Alan Greenspan will speak about mortgages at 12:30pm ET today. This could be interesting after Pimco's Bill Gross just went on record stating he is now bearish on bonds. And Greenspan has been a bit of an enigma when it comes to advice on mortgages. Among several odd remarks was the famous flip on ARM loans back in February of 2004. Greenspan suggested homeowners should switch to ARM loans and save the difference in rate costs. Then he turned around the very next day in a speech before the Senate Banking Committee and scolded Fannie Mae and Freddie Mac for their dangerous mortgage loan practices. It will be interesting to hear his take on the recent action in the mortgage market.
The trend remains lower and remains ugly. However, there is some hope. If you take a look at the Bond Page, you can see that prices are hovering 10bp above a floor of support. If prices can hold at these levels, they may make another attempt to bounce higher. Additionally, there is another VERY STRONG floor of support at $97.84, or 44bp lower than where we are now. There is a good chance that this floor, labeled S2 on the bond page, will hold.
Market Update June11,2007
As a result of the recent price decline in Mortgage Bonds, we are switching our focus towards the FNMA 30-year 6% Mortgage Bond from the FNMA 5.5% Mortgage Bond. The 6% Bond demonstrates the majority of trading volume and is more closely tied to current market rates. The Bond Page and Text Messaging reflect these changes and you still have the ability to chart the FNMA 5.5% coupon on the Bond Page.
"It's just another manic Monday, I wish it was Sunday" - The Bangles. It seems like the weekend may be the only time Mortgage Bonds don't trade lower as Bond prices are under selling pressure once again this morning. The Bond market is trading lower on news that Japan reported better than expected economic data. Like we saw last week with New Zealand and Australia, global economic growth and inflation risk is causing foreign countries to hike interest rates. And as countries hike interest rates, more attractive yields abroad is causing money to be siphoned out of the US Bond market.
Here's an important story to pay close attention to - in the past we discussed the Yen carry-trade, where traders borrow money tied to the Japanese Yen and reinvest that money in higher yielding investments in countries like the US or Australia. So why is this important? The higher rates offered in the US are attractive to Japanese investors because rates in Japan are far lower. So many Japanese investors are big buyers of US Treasuries and Mortgage Bonds. And while it may seem like getting 5% in the US instead of 1% in Japan is a good and simple strategy there is another moving part that needs to be considered, which is the currency exchange rate between the US and Japan. Lately, the US Dollar is losing ground in value versus the Japanese Yen because the percentage loss of the Dollar vs the Yen has been greater than the additional yields offered in US Bonds, many Japanese have decided to unwind their holdings in the US. This is putting additional selling pressure on our Bond market. Japan is presently the largest holder of US Mortgage Bonds.
There are no economic reports set for release today, but traders will belly-up to a full plate of potentially market moving data later in the week, including Wednesday’s release of Retail Sales; Thursday’s Producer Price Index (PPI) and Core PPI Index; Friday’s New York Empire State Manufacturing Index and the Consumer Price Index (CPI) with its closely monitored Core CPI.
Mortgage Bonds continue to struggle to find stability and put a winning streak together. Market volatility has certainly picked up some serious steam and shows few signs of slowing. With the change in bond market sentiment from “bullish” to “bearish,” traders in mortgage bonds are more likely to sell into any rally attempts, rather than buy into declines, until sentiment greatly improves. This morning’s early market action demonstrates this bearish “sell the rally” mentality and market psychology. Nearest overhead resistance is located at $99.19 while further resistance is found at $99.37. The next long-term support levels are located at $98.16 and $97.84. Unfortunately, the overall trend remains lower, so we will continue to lock until the market stabilizes.
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