Mortgage Market Update - Oil hits a new high

MMG Update - Tuesday, May 6, 2008 9:14am ET

Current Trend Direction: Sideways

Risks favor: Floating

Current Price of FNMA 5.5% Bond: $100.59, +19bp

Bonds are moving higher this morning after bad news was released for Fannie Mae, the largest provider of US home financing. The company said it lost $2.19 Billion in the first quarter due to the current housing and credit crisis, which equates to a loss of $2.57 a share compared with a profit of 85 cents a year ago. And like Freddie Mac, the company plans to raise capital and cut its dividend. Stocks traded lower on the news, pushing money into Bonds and helping Bond pricing improve.

In other headlines, oil hit a new record high of $120.93 this morning. Oil prices have doubled over the past twelve months, pushing the average price at the pump to $3.60 a gallon. Goldman Sachs is forecasting that black gold could rise to $150-$200 a barrel in the next twelve months. If this plays out as they suggest, the inflationary effects of high oil prices could pressure Mortgage Bonds lower, causing home loan rates to move higher...so this will be a story to watch. In other words, it might be the time to buy now while rates are low. And, because of the inflation alone, we may see higher home prices.

For now, Bonds continue to ride a dual floor of support at the 50 and 100-day Moving Averages. We will continue to Float for now, and watch how the Bond behaves near this strong floor.