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.
Showing posts with label Mortgae Market Update. Show all posts
Showing posts with label Mortgae Market Update. Show all posts
Monday, July 9, 2007
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.
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
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.
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