Greetings from Cancun, Mexico this week and the beach sure looks a lot better than the mortgage bond trading pit. Things are already looking ugly for mortgage bonds, but I will get back to that in a moment.
Last week saw mortgage bonds start off in another rally mode, though they came under attack even as data flowing was favorable for mortgage backed securities overall. The week started with news of Lehman filing bankruptcy with Bank of America and Barclays backing away from bids. B of A just had to buy something, so they turned around and bought Merrill Lynch.
The Fed flipped their viewpoint on AIG and bailed them out as they realized they just couldn’t let the world’s largest lender fail. News of more takeovers and banks looking to be taken over, like Washington Mutual, hit the airwaves as the week went on. Certainly, nobody missed Friday’s news of the most massive bail out in history that is yet unfolding.
As the trading went on through the week, we saw news taking of real data as it came to market movements. In simpler terms, fears (or lack thereof) were the driving force of the markets and not necessarily reality. Data that was released this week showed continued weakness in housing, however it also showed inflation overall dropping along with core inflation holding fairly steady. All of the data favored bonds overall, yet they couldn’t get back into rally mode as news favored the stock market. The week ended with mortgage rates bonds only losing 6 basis points.
This week promises to have more of the same, that is news playing the role as market driver. There is no data slated for release until Wednesday and no typically “major” players due out this week, except maybe the GDP Chain Deflator and possibly Consumer Sentiment. That also means that technicals will play a large role in where mortgage bonds will head and that does not bode well for them for now. Just think, if you keep hitting the floor hard enough, eventually it will break and you will fall. The same is looking rather apparent in the mortgage bond charts.
Here is what we do have for data this week:
- Monday: No data, plenty of news already
- Tuesday: No data
- Wednesday: Existing Home Sales (10:00), Crude Inventories (10:30)
- Thursday: Durable Goods Orders (8:30), Initial Jobless Claims (8:30), New Home Sales (10:00)
- Friday: GDP Chain Deflator (8:30), GDP (8:30), Consumer Sentiment (10:00)
Getting back to the charts, we see a type of head and shoulders pattern (not well defined) that formed and that is not good for the future of mortgage bonds. With bonds unable to make a new “peak”, they show weakness and odds favor prices heading lower through their support layer. Stochastic indications remain on the overbought side, though they have backed off some. There is some good news as the 25-day moving average is not very far below current pricing and it crossed over the 200-day moving average, usually a good sign.
So, the picture the charts paint is fairly simple, mortgage backed securities will likely see at least a short term drop in prices and we will see mortgage rates likely tick higher as a result. The question for the future will be can mortgage bonds remain in their current uptrend, but even that may falter in today’s market environment.
You think the Treasury is going to use the $700 billion as a new weapon, replacing the Fed’s rate cuts? I mean, everytime there’s a hiccup, they pump out some 50 odd billion and try to douse the flames a bit? That would explain why Paulson wants so much freedom to do whatever they want with the money.
So you think that the current market favors locking? What impact do you think the bailout specifically will have on long term mortgage rates?
Chad C.
Though this crisis is severe it must be remembered that our markets historically show a very clear pattern of bull and bear cycles so it is just going to take some time to weather the economic storm.
A lot is going to have to change with the U.S. government to avoid this kind of meltdown in the future. As well, CEO’s and executives from mortgage lenders, banks, etc. have to start paying a price for their reckless business practices and greed.
Chad – when I did this report last week, the answer was yes and I was right on. Check out this week’s update for what I am planning this week.
Pat and Darin – Yes we will get through this whole turmoil and if the government can stop intervening, that will likely be sooner rather than later. A little turmoil is good for the economy overall as it “cycles”. As for CEOs, it is a nice dream to think that we could have moral and ethical executives again.
Though this crisis is severe it must be remembered that our markets historically show a very clear pattern of bull and bear cycles so it is just going to take some time to weather the economic storm.