10 Yr Bond lowering yield?

Tuesday, September 25, 2007

ECONOMIC DATA / NEWS

We’ve been talking about how the bond market should improve as the economic data shows weaknesses in the economy.  Today was a perfect example.  Consumer confidence, as reported by the Conference Board, is usually a “second tier” piece of data.  However, every little bit of data is being put under a microscope lately.  The word recession is at the front of people’s minds, and investors are taking every indicator very seriously.  The consumer confidence index fell from 105.6 to 99.8.  This index can be fairly volatile, but a move of 5 points or more is considered significant.  Higher oil prices, slower job growth, and increased warnings of an impending recession by many experts has got consumers a little nervous.  When consumers get scared, they tend to cuddle up with their money, which means less spending, which will eventually lead to the recession that everyone is so worried about.  It is basically one of those self-fulfilling prophecies.

At least existing home sales weren’t as bad as some economists had forecast.  However, the annualized sales rate did drop from 5.75 million to 5.50 million.  Inventories are a little higher as a result.  They are up to about a 10 month supply, which is the highest it has been in 18 years.  However, as we’ve pointed out numerous times before, homes and homeownership have grown exponentially over the last 10 – 15 years, so it is to be expected that there would be some extra homes on the market during a slower period.  The reason that inventories grew so quickly is because sales were running at a break-neck pace previously.  It’s like cruising along on the freeway going 90 and then having to slam on your breaks because a few cars in front of you slowdown.  It’s going to have a temporary ripple effect of slowing everyone down.  If everyone was moving along at the same pace, we wouldn’t see these extremes.  But as we know, traffic does eventually work itself out, and so will the housing market, gradually.

TECHNICAL ANALYSIS

MBS prices jumped higher right out the gate, so it wasn’t the economic data that caused the gains.  It has helped sustain them though.  The FNMA 30-year 6.0% is holding at +12bp at 100.09.  That is 1bp below the 200-day moving average, proving that prices are still having trouble breaking above this level.  The 25-day moving average appears to be the bigger resistance level though at 100.19.  That’s why we could see some sideways trading patterns before another rally ensues.

After making a ridiculous run up last week, the 10-year Treasury yield has come back down to a more reasonable level.  The yield is hovering around 4.59% this morning, and it has already touched the upward trend line.  We need to close below this level, currently around 4.57%, before the yield can set a new downward trend.

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