After a decent day for the benchmark mortgage bond on Friday, we are seeing a little follow-thru.
Bonds are improving marginally on some weakness in stocks (sometimes they trade together, sometimes they don’t). The real reason is some snippets from the Chinese government that they will provide little stimulus. That has stocks under pressure in Asia, Europe and here and coupled with this morning’s existing home sales which were a miss at 5.05m units on expectation of 5.20mm units has mortgage bonds +16bps and outperforming treasuries which are currently yielding 2.56%. The bigger picture is that small bounce we’ve had (we are still down 60bps for the month of September) has the indicators showing bonds are relatively in balance (not oversold much anymore). Rates could certainly improve from here (especially if we get more negative news from Europe) but for the moment, it looks like this is the sandbox we are playing in. Here's the graph for this morning:
While the benchmark bond is not technically oversold anymore, it is still very close to that line so there is some decent potential for more improvement to rates but I would be very cautious in floating and be ready to lock with any kind of good economic news - especially if it's significant.
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