Update 5/5/10
Risks favor: Very Carefully Floating
Current Price of FNMA 4.5% Bond: $101.19, +19bp
Mortgage Bonds are trading higher so far today, but off their best levels. The Bond market continues to attract investment dollars as a safe haven from the ongoing – and increasing – uncertainty over the situation in Greece.
Today, over 40,000 Greeks are rioting in the streets, engaging in violent protests against the Greek government’s proposed austerity measures. This has spooked the Stock market, and is helping Bonds move higher. Further – another troubling headline is coming from the Eurozone today, as Portugal is apparently facing another potential downgrade on their debt – prompting investors to move even further into the safe haven of Bonds.
Market volatility has been sharply higher of late, and the VIX volatility index – which measures volatility in the Stock market – has risen very sharply over the last four trading sessions. The VIX is a widely used measure of market risk, and is often referred to as the “investor fear gauge.” One look at the Bond Page shows you how the volatility in Stocks is impacting Bonds, as they have traded in a wide 44bp range just this morning.
While Bonds are higher – we need to exercise great caution. Bond prices are near resistance marked by the highs seen back in February and March. Additionally, Bonds are now in an overbought state, making them ripe for a reversal lower.
In economic news this morning, ADP’s read on employment for April showed 32,000 private jobs created, essentially in line with expectations, and representing the third straight month in positive territory. Now remember – ADP is not always in line with the official Jobs Report, which is due to be released this Friday. Expectations for the Jobs Report are to show 187,000 new jobs created. Tomorrow we will lay out our Jobs Report Strategy, headed into that important release.
The Institute of Supply Management Services (ISM) report for April came in at 55.4, very close to expectations. The market had little reaction to either the ISM or ADP reports being released, in light of the wild conditions taking place in Greece and Europe overall right now.
For now, we can continue to recommend a bias towards Floating, as the safe haven play could well continue as the troubles in Europe persist. That said – we need to be very cautious, as the Stochastic Chart on the Bond Page clearly shows that Bonds are in an overbought state, as well as nearing tough overhead resistance.