It is bright and early Monday morning and most of you are likely still sleeping.  Nevertheless, this post is coming early since bonds may finally be ready to break the barriers of resistance.  But, let’s recap what has happened this past week.

Right now, the United States and China are in a battle for Olympic Medals.  Inflationary fears and recessionary fears are also battling in the mortgage bond pit, only mortgage backed securities don’t have Michael Phelps and his record setting performances to help them.  Nevertheless, mortgage bonds did manage to muster a late sprint which got them over their 25-day moving average finally.  But can they hold?

As the Olympics kicked off, Russia kicked off their own battle, taking on Georgia, Fannie Mae issues made headlines, and the 25-day moving average was too tough for bonds sending them crashing down as the week got started.  The strengthening of the dollar was not helping mortgage bonds either.  Bonds were down throughout the middle of the week, finally rallying Friday.

Data was not very helpful to mortgage rates overall, providing fuel to both sides of the battle.  But Fed Pres. Stern was there to calm inflation fears during a couple of speeches this past week, citing that lower oil prices were dropping inflationary expectations.  Apparently, the markets bought it because the mortgage bond market rallied, breaking through their 25-day moving average, despite the highest inflation (CPI) since January 1991.  Continued unemployment climbs are aiding the recessionary fear factor as well.

Now, the question going forward is whether or not bonds can hold their ground, or will they get beat back down again.  This week will see data from both sides of the battle again, with PPI and the Philadelphia Fed Index along with housing data.  With bonds still in an overall long term downtrend, this week could be extremely pivotal if they can hold, even make some more gains. 

Here is the fairly light schedule of data this week:

• Monday:  None
• Tuesday:  PPI (8:30), Building Permits (8:30), Housing Starts (8:30)
• Wednesday:  No data
• Thursday:  Initial Jobless Claims (8:30), LEI (10:00), Philadelphia Fed (10:00)
• Friday:  Crude Inventories (10:30)

On the technical side, the rally looks a little questionable.  While short term indications are fairly good, stochastic indicators have a large spread and are entering overbought status, the long term downtrend remains in place, and mortgage bonds are up against their 50-day moving average.    Bonds will need to hold steady or gain more in order to paint a better picture of the future.  With no data today, news will again be the “guide”.

As the week begins, there may be a chance to float, but exercise extreme caution until the charts paint a better picture and keep that finger on the lock trigger, just in case.