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.