Lower TICS means Lower Bond Prices

Tuesday, October 16, 2007

ECONOMIC DATA / NEWS

Leave it to Fed Chairman Ben Bernanke to make interesting statements at unusual times.  Just when investors and consumers are most nervous about the housing market, Bernanke assures them that housing is going to continue to suffer.  In a speech given last night, he said that housing “remains a drag on the economy.”  It doesn’t help that this comes right in the middle of earnings season, and that several major companies, including Johnson & Johnson, Wells Fargo, and Ericsson, announced weaker than expected profits for the third quarter.  The Dow is now down about 100 points, but, on the bright side, that has helped bonds.

One piece of news that threatened to pound bond prices lower was the TICS net flows data, which measures foreign investment in U.S. securities.  The result was negative for the first time since 1998, meaning that foreign investors were selling more U.S. securities than they were buying.  An important note is that this occurred in August, when Countrywide was borrowing money from other banks, the Fed cut the discount rate, and mortgage defaults were reaching record levels.  That would be enough to scare away any investors, foreign or domestic.  And not only were the flows negative, but they were down by $69.3 billion.  That doesn’t even include short-term vehicles like T-bills, which sent the amount sold to $163 billion.

September’s industrial production gave a weak reading of .1%, and capacity utilization dipped slightly from 82.2 to 82.1.  Thursday’s Philly Fed Survey will probably confirm that New York was the only region that experienced a burst in orders for manufactured goods.

TECHNICAL ANALYSIS

A 9bp gain for the FNMA 30-year 6.0% is a nice addition to the post-rate-sheets 6 to 12bp gains from yesterday.  The price is up to 100.09, so it looks like we will spend another day above the 50-day moving average.  But, we’ve still got that pesky 10-day moving average in the way at 100.13.  If the stock market keeps dropping though, we could potentially break it by this afternoon.

The 10-year Treasury yield is finally making a decent attempt at dropping, but it is lingering around 4.65% after bouncing off the 10-day moving average around 4.63%.  The stochastics have barely crossed, which could mean the start of at least a short downward trend.  However, the yield needs to finish the day around its current level or lower before we start thinking about any new trends.  Additionally, tomorrow’s CPI data should have something to say about the direction of bonds.

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