Money goes towards bonds and rates get better

Friday, November 09, 2007

ECONOMIC DATA / NEWS

If you thought $347 million is a big loss for one quarter, how about a $1.1 billion dollar loss in one month?  That’s how Wachovia says its asset-backed securities, mostly consisting of mortgage-backed securities, declined in value in October.  Bank of America will announce their third quarter earnings later today.  The banking sector has not hit a bottom yet as is reflected in the continuing declines in their stock prices.  Fannie Mae itself just reported a $1.39 billion loss last quarter, over three times Wachovia’s losses.  Now Washington Mutual is under investigation by the attorney general for pressuring appraisers into overstating property values.  This has undoubtedly affected Fannie Mae’s bottom line, as WaMu is the third largest seller of mortgages to Fannie Mae and Freddie Mac.  Other lenders may come under investigation as well.  This will probably push banking and financial stocks lower in the short-term, but because they are implications regarding past actions, it should not have much affect on new issues of MBS.

Consumer confidence slid to its lowest point in two years.  The University of Michigan sentiment survey gave up six points from 80.9 to 75.0.  But then there hasn’t been much for consumers to get excited about lately.  Their home values are falling, oil and gas prices are soaring, stocks are dropping, and now the Fed says things may get worse.  Weaker consumer confidence is one indicator that economists look at when predicting consumer spending, the biggest contributor to GDP, over the next few months.  The weakness is even worse based on the timing, seeing as how we are entering the biggest two shopping months of the year.

The trade gap shrunk in September, which, for some reason, caught economists by surprise.  With the dollar getting crushed against all major foreign currencies, exports have been on the rise, which has nibbled away at the U.S.’s monthly deficits.  If went from $57.6 billion in August to $56.5 billion the following month.  Although it won’t be a major factor, it is one input that could actually increase GDP.

Import prices have been skyrocketing on a monthly basis.  Last month they almost doubled expectations by jumping 1.8%.  Of course, all you have to do is extract oil and all of a sudden, import prices only rose by .5%.  All imported goods are becoming more expensive because of high oil prices and the weaker dollar.  It does not need to be overly scrutinized unless we see the increase seep into domestic prices.

TECHNICAL ANALYSIS

MBS prices have not caught up to Treasuries yet, and it could be a very long time before they do.  But, the FNMA 30-year 6.0% is up 9bp right now as investors are looking for a greater return than what they’ll get from Treasuries.  However, at 100.56, the price is below resistance at 100.62 for a fourth consecutive day.  The 25-day moving average has saved prices from falling lower, and the upward trend line is within about 12bp.  The trend line should be a strong support, so we may finally see prices rise again in the next week or two.

As money pours out of the stock market, bonds are slurping up every dollar they can catch.  The 10-year Treasury yield has plunged to a new two-year low at 4.23%.  There is no real support anywhere near the current yield, which makes resistance almost irrelevant at the moment.  Treasuries are going to rise and fall with the stock market, but even with stochastics in overbought territory, there remains strong demand for Treasury bonds.

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