If things are broke, fix it. That is the story of my trip this morning as the aircraft is broke in Philadelphia and that is the story happening in the mortgage market with Fannie Mae and Freddie Mac. More on that in a bit.
Last week saw a wonderful looking pattern fall to pieces and the longer term downtrend remains in place. Mortgage backed securities started the week off on fire, fueled by Bernanke’s speech. Middle East tensions also lit a fire under mortgage bonds as tensions create a “flight to quality” which sends money from stocks into bonds. As the week came to an end, despite Paulson’s talk up of Fannie and Freddie, their liquidity issues overwhelmed the markets and both stocks and mortgage bonds plummeted on Friday.
How this week begins will be depending on a number of factors. With the Federal Reserve set to bail out both Fannie Mae and Freddie Mac, things will probably start off the week nicely, meaning bonds may yet be able to break the downtrend. With no economic data slated for Monday, bonds will likely see a favorable move, but the week will see more data coming out that can prove either beneficial or destructive.
Here is the breakdown of scheduled data:
- Tuesday: Retail Sales (8:30), PPI (8:30), Empire State Index (8:30)
- Wednesday: CPI (8:30), Industrial Production (9:15), Capacity Utilization (9:15), Crude Inventories (10:30), FOMC Minutes (2:00)
- Thursday: Building Permits (8:30), Housing Starts (8:30), Initial Jobless Claims (8:30), Philadelphia Fed Index (10:00)
As you can see, there are some “biggies” slated this week, so expect more volatility and a definitive pattern before the week is done. With no data to start and no data to end, headlines and technical factors will play an increased role those days.
On the technical side, you can see the long term downtrend in place but there is still a shorter uptrend in place as well, so bonds could still break the downtrend. The week will start off good with the bailouts hitting the headlines, but the data will takeover starting on Tuesday which will be the real determinant of where bonds go from here.
I will be starting the week off in a floating stance, but my finger will be itching to lock if things breakdown again. Hopefully the data will be bond friendly and we can start saying lower rates ahead, but I remain rather skeptical.
Well, Monday was a rout for banks. Indymac fever seems to be spreading to other banks. Dunno if the Fed boosting Fannie & Freddie is going to be enough.