Market Update

MMG Update - Friday, June 27, 2008 10:59am ET

Current Trend Direction: Sideways

Risks Favor: Cautiously Floating

Current Price of FNMA 6% Bond: $100.59, +19bp

On the heels of the Fed decision to leave the Fed Funds Rate unchanged, their favored gauge of inflation arrived this morning, the Core Personal Consumption Expenditure (PCE) reading. The Core PCE rose 0.1% during May, lower than expectations of 0.2% - which left the closely watched year-over-year Core inflation rate at 2.1%. This is outside the Fed's desired range of 1 - 2%, but tolerable in light of the ongoing inflation fears...which has to come as a relief to the Fed.

Also embedded in the PCE report are readings on Personal Income and Spending, which both grew at rates larger than estimates in May. The boost in spending was likely due to the stimulus checks that were sent out to many American taxpayers in the beginning of May.

Oil hit a record high of $142.26 this morning and the inflationary fears inherent in rising oil prices are keeping a lid on both Stocks and Bonds. Stocks have been downright ugly, as the Dow is poised for the worst June since the Great Depression. But at the same time, Mortgage Bonds haven't performed well either...inflation is bad news for both Stocks and Bonds.

The University of Michigan's Consumer Sentiment index fell to 56.4 in June, from 59.6 in May. It's the lowest since 1980 and the third-lowest reading in the 56-year history of the survey. Mortgage Bonds are being helped by this poor economic news.

The ceiling of resistance at $100.47 is being tested again, but has been difficult to break of late. This gives us extra reason for a cautious approach this morning, as we want to see if prices can break above this barrier...but also must remain on guard, because a reversal from this level leaves a long way down before the next floor of support. Take a look at the Bond Page, and you can see how Bond prices have been unable to overcome the $100.47 ceiling, even in the face of a nearly 400 point decline in the Stock market yesterday, which should have pushed some money over into Bonds. We can carefully Float for now, but be ready to Lock as this formidable level of resistance could push prices lower still.

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.

What is a Bond?

We are better familiar with James Bond 007 as a fictional British agent[1] created in 1952 by writer Ian Fleming, featured in twelve novels, two anthologies, and a film series than financial bond which by the way affects mortage rates....

so, what is bond?

TECHNICALLY SPEAKING, a bond is a loan and you are the lender. Who's the borrower? Usually, it's either the U.S. government, a state, a local municipality or a big company like General Motors. All of these entities need money to operate -- to fund the federal deficit, for instance, or to build roads and finance factories -- so they borrow capital from the public by issuing bonds.
Now for a little bond-speak. When a bond is issued, the price you pay is known as its "face value." Once you buy it, the issuer promises to pay you back on a particular day -- the "maturity date" -- at a predetermined rate of interest -- the "coupon." Say, for instance, you buy a bond with a $1,000 face value, a 5% coupon and a 10-year maturity. You would collect interest payments totaling $50 in each of those 10 years. When the decade was up, you'd get back your $1,000 and walk away.
A key difference between stocks and bonds is that stocks make no promises about dividends or returns. General Electric's dividend may be as regular as a heartbeat, but the company is under no obligation to pay it. And while GE stock spends most of its time moving upward, it has been known to spend months -- even years -- going the other way.
When GE issues a bond, however, the company guarantees to pay back your principal (the face value) plus interest. If you buy the bond and hold it to maturity, you know exactly how much you're going to get back (in most cases, anyway. I will discuss some exceptions later). That's why bonds are also known as "fixed-income" investments -- they assure you a steady payout or yearly income. And although they can carry plenty of risk (I will discuss why in our How Bonds Behave lecture), this regular income is what makes them inherently less volatile than stocks.

Market Info

Bonds are trading slightly higher this morning but may come under a little pressure later today, as Stocks have opened higher on the heels of strong earnings and future outlook from Wal-Mart.
Wal-Mart is a bellwether for the entire retail sector, and with the important Retail Sales report due tomorrow morning, Traders could now be expecting a strong Retail Sales number--which would be good for Stocks, but bad for Bonds. So I will be watching carefully as the day progresses, since Traders may position themselves into Stocks rather than Bonds.
Technically, Bond prices remain above the 25-day Moving Average. With little economic news for the day, Bonds will likely continue to be driven by Stocks. For now, I recommend to Cautiously Float, as long as Bonds remain above the 25-day Moving Average.