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.