The House has to make a decision!

In testimony before the House of Representatives, Fed Chairman Bernanke spoke in detail about the implications of an increase in the conforming loan limit.  Although on the one hand it seemed like he was in favor of the increase, he gave many warnings about the dangers of it.  For starters, he is concerned that the government would be taking on a greater amount of risk, because they implicitly support Fannie Mae and Freddie Mac, even though they are technically independent business entities.  Bernanke explained that IF congress did decide to raise the limit, they should do it quickly so as to limit the speculation that is causing such volatility in the financial markets.  He also urged that the adjustment to the limits should be temporary, and it should be made very clear that this is the case.  Otherwise, the government would be opening the country up to a new round of irresponsible borrowing and lending.  To sum up his comments, Bernanke does appear to be in favor of higher limits, provided the move is bold, decisive, and temporary.  Now it is up to congress to actually make the decision.

The only economic data for the day was weekly jobless claims.  They dropped by 9000 to 311,000, but that won’t take the sting out of the loss of 4000 jobs in August.  Weekly jobless claims probably won’t affect trading again until after the next monthly jobs report.

The FNMA 30-year 6.0% gapped 15bp lower, and it is now down 18bp this morning.  At 100.41, prices are still 29bp above the 200-day moving average.  Prices could potentially drop that far before bouncing higher again.  The piercing line formation made up by the previous two day’s candles and this morning’s gap lower are two indications that momentum has turned downward.  Losses could continue over the next two or three days at least.

After hitting close to a two-year low a week and a half ago, the 10-year Treasury yield has been on a steady upward path.  It could be defined as a short-term upward trend, which has brought the yield from 4.30% up to 4.60% in just eight days.  There is moderate resistance at 4.70%, but the yield probably won’t climb that high unless there is another big rally in stocks.