Sliding all the way down

Monday, September 10, 2007

ECONOMIC DATA / NEWS

The futures markets are now signaling they believe there is a greater than 80% likelihood of a Fed rate cut next Tuesday.  A growing number of analysts are forecasting the cut will be .50%, commensurate with the discount rate cut last month.  The dollar is at 15-year lows this morning, because if the Fed cuts the Fed funds rate, then the spread between U.S. and European rates will shrink even more.  That could lead investors to start looking at investments from these other countries as they search for greater returns.  However, the weakening economy is still the overwhelming factor moving the markets, which is why bonds continue to rally on a break-neck pace.

Investors are starting to worry more and more that the economy may be headed for a recession.  Although it is slightly behind the time-line we had set, we have been forecasting a recession since late last year.  Consumer spending will probably decline sharply in the coming months as a greater number of ARM’s adjust, because people will need to put more money toward their mortgage payment.  But, as rates fall (and once program guidelines relax a little), some refinancing opportunities may help ease some of the pressure.

And, while most investors seem to be doing whatever they can to stay as far away from real estate related company investments, one man has been shoveling money into a major lender over the last month.  Billionaire Joseph C. Lewis, who made his money in currency trading, has been snatching up shares of Bear Stearns since August.  He apparently now owns 8.1% of their stock, and he is believed to now be the largest shareholder.  Even with their two failed hedge funds and mortgage defaults on the rise, this man obviously believes the market will rebound.  This has to be instilling some confidence in the mortgage market, which almost certainly has helped pull more money into mortgage-backed securities.

Economic data is slim this week until Friday, and that data is not too likely to hurt bonds.  The primary reason is that traders will be much more focused on the Fed rate decision next week.  And furthermore, retail sales figures and industrial production have a better chance of coming in weaker than stronger.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% is up 6bp this morning.  And although it is not a big gain, it is an extremely positive sign after the gains from last week.  Normally, there would be some sort of retracement due to profit-taking.  However, the fact that prices keep rising indicates confidence in the market as well as an assumption that mortgage bonds will be a hot investment for an extended period of time.  There is very little stopping the rise before the six-month high of 101.06.

The more the news highlights the outlook of a possible recession, the quicker money flocks into Treasuries.  The 10-year yield cut through support at 4.45% last week and continues to plummet this morning.  As of today, we’re at a 23 month low of 4.32%!  When the yield had shot to 5.30% a few months ago, we had upped our estimate for the 10-year yield to the low 4.00% range by the end of the year.  However, with the recent rally, we are now anticipating a dip to at least the mid 3.00% range.

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