Mortgage Market Update

Last week was going normal until Bhutto was killed in Pakistan.  As is typically the case, markets go nuts and a "scramble" takes  place, in this case it was a "flight to quality" which benefited mortgage backed securities.  The movement in the markets is also exaggerated by the shortened trading week and low volume during the holidays, so major "swings" can happen even if not deserved.

So, besides the killing, did anything change to warrant such a move as mortgage bonds saw?  Not really.  The news has been the same for a while.  Housing still misses the mark and inflationary pressures still exist.  That may change this week as we will see some major players in the markets coming.

For now, the bond rally is going to continue on uncertainty in the geopolitical spectrum and hope that the upcoming data will be favorable.  Expect more volatility as the week moves on low volume and due to another shortened week.  If you have not already switched to a "cautiously floating" stance, do so, but remain cautious as the fundamentals have not changed and if they don’t in the reports coming up, bonds will implode.

Here’s what’s on the docket for the week…

• Monday – Existing Home Sales (10:00)
• Wednesday – ISM Index (10:00), FOMC Minutes (2:00)
• Friday – Unemployment Rate (8:30), Hourly Earnings (8:30), Average Work Week, Non-farm Payrolls (8:30), ISM Services Index (10:00)

As you can see we will have two "main events" this week, the release of the "Fed Unplugged" Wednesday afternoon and the "Jobs Jamboree" on Friday.  Let’s just say that the New Year will start with a bang for sure, the only question will be which side of the spectrum it will be on.

So, as we start the week, and the New Year, I will be in a cautiously floating stance, ready to switch at a moment’s notice if reality proves the fundamentals have not changed and mortgage bonds head lower as a result.