Lower rates today but how long will they last?

Monday, November 26, 2007

ECONOMIC DATA / NEWS

Excitement over a strong retail sales weekend is being muted by some troublesome announcements this morning.  First off, retail sales were strong as we anticipated, rising 7.2% on Friday and Saturday from the same period last year.  But investors are constantly being reminded that last year’s Thanksgiving weekend produced better results than expected, and yet the rest of the holiday season was mediocre at best.  So, there are still another few weeks before investors will be truly convinced that consumers are spending.  Another downer was potential layoffs at Citigroup, which could total anywhere from 17,000 to 45,000 according to a report from CNBC.  This and other news, such as E*Trade’s struggle to sell or merge due to discrepancies in the value of their mortgage holdings.  Online lenders are not governed by the same laws as other lenders, which allowed them to offer even riskier loans than some of the major lenders.

And the Europeans are ahead of the game again.  While major U.S. lenders Citigroup, B of A, and JP Morgan have talked about funding Structured Investment Vehicles (SIV’s), HSBC, Europe’s largest bank has beat them to the punch.  They announced today that they would support two struggling SIV’s with $35 billion in funds.  SIV’s biggest investments are usually mortgage-backed securities.  Now that they are losing money on their current holdings, they don’t have the liquidity to buy new mortgages.  This is creating liquidity issues in the credit markets, which are already having a tough time finding investors for their new mortgages.  This has to be one of the big reasons that mortgage bonds are continuing to reach long-term highs this morning.  Although this is a European bank, the U.S. banks and government have been following certain trends in Europe related to providing additional capabilities that allow banks to lend money.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% has just reached a new six-month high at 101.16.  We did not expect a move this large this early in the holiday shopping season.  And with strong retail sales over the weekend and Treasuries lingering deep in overbought territory, it seemed inevitable that all bond prices would be on a sharp slide any day.  However, fear has seemingly overtaken technical factors, and investors are uneasy about risky stock positions during these uncertain times.  If the bond closes above 101.12, this level will become a support.  We are still concerned that prices may top out soon, but today should be a pivotal day in assessing the likely future trading direction.

Today has been an interesting day for Treasuries.  The 10-year yield started the morning up at 4.04%, but now finds itself near the six month low of 3.98%.  Severely overbought conditions and strong support around the current yield are preventing additional gains.  But there is also a lack of willingness to push the yield higher, as is indicated by the last two candlesticks on the chart, which are both inverted hammer formations.  Where the yield finishes the day will probably be very dependent on how the stock markets perform.

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