Yields Drop

Monday, October 01, 2007

ECONOMIC DATA / NEWS

This morning, Citigroup announced that they are forecasting a 60% drop in earnings for the third quarter.  They are writing down the values of $1.3 billion worth of subprime mortgage-backed securities.  It shows that lenders still view problems as contained to the subprime market, but elevated losses in any aspect of their business will result in less lending capability as a whole.  It will be important to watch for upcoming profit announcements from lenders to try to figure out whose non-conforming rates may worsen in the short-term.  The more losses they are taking, the less likely they will be to offer better rates or extra programs.

Manufacturing went the opposite direction as most economists were expecting.  The ISM index ticked lower from 52.8 to 52.0.  The sector had perked up a little between May and July, but has really slowed over the last two months.  Every piece of weaker economic data brings the economy one step closer to recession.

The rest of the week will probably focus on Friday’s jobs report and whether or not it can rebound from August.  A little attention may be paid to the ISM services index.  The lower it is, the more likely traders are to buy bonds to protect against a possible recession.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% is up 6bp at 100.16.  The 200-day moving average has held prices up over the last three days, even though we traded below it for several days prior.  The upward trend line is passing 99.80, and prices have not closed lower than 99.97 since the first day of September.  The 50-day moving average is moving almost in sync with the upward trend line, which adds to the strength of the support.

The 10-year Treasury yield is down to 4.55% after peaking at 4.70% just a week and a half ago.  We have said goodbye to the upward trend line.  Now we’ll see if the yield can make another run at 4.30%.  Our forecast for a drop below 4.00% by the end of the year still stands.

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