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Tuesday, December 8, 2015

Mortgage Bond Market Analysis - Inching Closer to the Fed Decision

Happy Tuesday.  Three more data points that are weaker than expected.  The NFIB Business Optimism Index came in at 94.8 vs. expected of 96 and previous of 96.1.  JOLTS came in a fair amount weaker at 5.383 vs. expected of 5.525 and previous of 5.526.  Finally, IBD / TIPP Economic Optimism came in better than expected at 47.2 vs. 45.2 and previous of 45.5 but still below the benchmark 50 that would show some decent optimism.

Last Thursday, mortgage bonds sold off in a big way when Draghi didn't come through with the stimulus as promised.  This is typical of financial markets - investors / traders don't like to be surprised in a bad way and when they are, they bail.  While there is reason to keep rates where they are as far as the Fed is concerned, there is also reason to begin raising the Fed Funds rate if only to remain in line with expectations.  While we may get some buying if the Fed surprised us and stood pat, it may also cause the markets to be in turmoil with a lack of confidence in the Fed.  That said, if the data doesn't warrant an increase, then so be it, but it's not that cut and dry.  The economy isn't very strong but it is improving.  Inflation data is ticking up along with the jobs data, which is expected.  The CPI which comes out on the 15th may be the tipping point if the Fed hasn't already made up its collective mind by then.

Yesterday I wrote about the resistance levels the bond faced with the first level not being too strong but the 2nd level being a bit stronger with the 100 day moving average being at that level as well.  Add in the possibility of a Fed increase next week and prolonged buying is not likely.  Traders pushed the bond to the 2nd resistance level and ultimately it held with traders selling off in the afternoon.  The FNMA benchmark bond closed 17 basis point off its high of 103.72 (the 2nd resistance level) but it still closed up 21 basis points to close 7 basis points above the 1st resistance level.  The bond is currently down 5 basis points at 103.50.  Like yesterday, I would recommend locking to take advantage of the gains.  There is very little potential for upside movement and the risks far outweigh the reward.  There is important data coming out on Thursday and Friday and I wouldn't want to float going into that data.

Contact me at 801-853-8720 or 702-812-1214 if I can help with anything and make it a great day.

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