Was everyone holding on to something last week as bonds plummeted over 300bp in four days? Fortunately, the jobs data came in as I suspected and bonds got a boost to end the week. But what happened all week that sent bonds into a nosedive?
To blame solely in one area would be inaccurate, but let’s just look at the top causes. First and foremost, our friends at the Fed can’t seem to keep their mouth shut and their speeches this week left more fears about inflation in charge of the markets.
Adding fuel to the fire, Thornburg Mortgage got caught up in a “margin call” situation which has been plastered all over the news sources. Why is this one important? Thornburg is known for the best quality loans and with them running into liquidity issues, the markets simply cannot believe any lender is safe.
The end result was me getting whiplash and writer’s cramps while trying to follow the bond market. More importantly, with Friday’s recovery, the damage was only about .375% to mortgage rates.
And this week is off to another wonderful start and my head is already hurting. As bonds started the week, they continued Friday’s rally, charging forth 31bp, only to burst their own bubble and crash back down to -19bp, and bounce back to their current levels of 9bp higher.
Why did I bring that up? All this in the first 2.5 hours of trading!!! That is the kind of market we are in right now. You can expect this volatility to last for much, if not all, of the week.
Looking ahead, we have some heavy hitters ready to attack bonds. The two “biggies” are Retail Sales, followed by CPI. The question will be, in the battle between recession and inflation, who will win the day and the week as the news airs out.
Here is the scheduled play by play for the week…
- Tuesday: Balance of Trade (8:30)
- Wednesday: Crude Inventories (10:30)
- Thursday: Retail Sales (8:30), Initial Jobless Claims (8:30)
- Friday: CPI (8:30), Consumer Sentiment (10:00)
Technically speaking, bonds are not in too bad of shape, except that a downtrend is forming for the long run. Bonds remain above their 200-day MA and are in a somewhat oversold condition. Depending on how this week plays out will likely show what the future holds for mortgage rates. I am starting the week again floating my clients with a very itchy trigger finger.
Good news yesterday if you think the Fed’s job is to battle the monster Wall Street created. The Fed announced it would add $200B of 28 day funds and make the money available to primary dealers as well as banks. The real news is that the Fed is going to take mortgage backed securities, agency and private label, as collateral for the loans. The mortgage markets have been obliterated, this action is much like Liquid Wrench is to a seized up fastening. This is not a long term fix but absolutely delivered a short term injection of confidence to a market that badly needed it. The Fed is not taking on these mortgages permanently, this is a 28 day loan with mortgages as collateral. Generally most still wince when they hear the term mortgage backed securities, there is much clean up left to be done. The Fed action, if continued, may begin to send the message that mortgages are once again a safe investment. There are sure to be some kryptonite moments as the Fed swoops to the rescue. Don’t touch that dial.