It's Monday of Fed decision week and the bond market is back to reality. Friday we got a gift when, in spite of better than expected data, traders still sold and rates got a bit better. It was a one-day respite of the selling in advance of the Fed's decision on interest rates which will be announced on Wednesday. As I was reading some things this morning I came across a few interesting thoughts about what the Fed will do and why. He thinks that the Fed has to raise rates so that there is room to lower them again if / when the economy stumbles again. He said that markets aren't buying the Fed's belief of continued growth. Indeed, we have seen too much mixed data and most of the important data hasn't shown sustained growth trends; employment, manufacturing and service sector data have waffled and been week at best with few exceptions.
This same expert also noted that markets expect China's economy to continue to weaken and that the EU is worried enough that they are providing stimulus to the tune of 60bil euro's per month. The PPI was basically meaningless last week with a reading of .5%. We will get the CPI tomorrow and the Fed may be able to justify an increase based on that and the recent jobs data but even then, there have been misses and the numbers may only be good because of the seasonal employment boost.
In any case, the FNMA benchmark bond is down 34 basis points today after ending up 40 basis points on Friday. At 103.17, it is currently 5 basis points below the 1st level of resistance. I'm not sure this matters since the focus is all about what will the Fed do (the expectation is for them to raise the Fed Funds rate) and what will they say - traders want information about the future. Justified or not, I would be locked - if you are floating, lock. As I've said before, as far as bond prices are concerned, there is much more potential for downside risk than upside reward. If what the Fed says and does provides impetus for traders to sell, it may go on for a few days or more. Be safe and call me if I can help with anything - 801-853-8720 or 702-812-1214. Make it a great day.