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.