MMG Update, Thursday, October 28, 2010
MMG Update - Thursday - October 28, 2010 10:21am ET
Current Trend Direction: Lower
Risks favor: Carefully Floating with Support just beneath current levels
Current Price of FNMA 3.5% Bond: $100.31, +34bp
After five days of selling pressure and losing nearly 150bp in price, Mortgage Bonds are starting the day higher, despite better expected economic news. This tells us that there is no fundamental or news related reason for the price improvement, but is simply a technical price bounce higher in the wake of a very steep selloff. While we are starting the day by Carefully Floating, we need to pay close attention to the price action in Bonds, as the recent trend is for prices to weaken as the trading day progresses.
On the economic news front, Initial Jobless Claims were 434,000, below the 458,000 expected, marking the third straight decrease in Claims and the lowest level since early July. Continuing Jobless Claims also fell by 122,000 to 4.36M. Additionally, there were 3.78M people claiming Emergency Unemployment Compensation (EUC) benefits, an decrease of 258,000 from the prior week. This is definitely an improved number…but we can't get too euphoric until we see the Initial Jobless Claims reaching the 400,000 mark and steadily moving lower from there. Stocks liked the report and moved higher on the news.
The Treasury will sell $29B in 7-Year Notes with the results to be released this afternoon. Yesterday's 5-Year Note auction was mediocre at best, so players will be looking at today's results very closely, particularly with the slightly longer term security being offered.
Bill Gross, manager of the world's largest Bond fund, PIMCO, recently offered strong criticism against another round of Quantitative Easing (QE2). He said “Checkwriting in the Trillions is not a Bondholder’s friend…it is in fact inflationary, and, if truth be told, somewhat of a Ponzi Scheme. It raises Bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up.” Whoa - "Ponzi Scheme!" Very strong words, and this is just following the harsh "bargain with the devil" comment from KC Fed Pres Thomas "BBQ" Hoenig. We don't always agree with Bill Gross, but he has it right here - printing more money is a negative to Bond investors, and could pose serious negative consequences to the economy down the road.
We will start the day by Floating and patiently see if Bond prices can stabilize and move a bit higher.
Mortgage Loan Officer
Bank of America Home Loans