Update 5/11/10
Risks favor: Carefully Floating
Current Price of FNMA 4.5% Bond: $101.41, +12bp
One Trillion doesn’t go very far these days. Just yesterday, news that the ECB had set up a $1 Trillion bailout for struggling Eurozone countries, was initially viewed as a positive measure and helped push the Euro and Stocks around the globe higher. But this morning, that boost of confidence in the Euro is waning. In fact, the Euro is now trading lower than where it was before the bailout was announced. Now there is concern about how these already financially strapped countries will pay for all this additional debt…hmm, sounds pretty familiar to what we said just yesterday. Mortgage Bonds are just slightly higher on the news and well off their best levels seen earlier in the day.
We have talked many times about how an extended period of accommodative monetary policy by a central bank can spur inflation. And this morning, China, which went through a period of very relaxed lending standards to boost their economy is now seeing year over year inflation at the highest rate in 18-months. This is troublesome because inflation in China could spill into the US, as the increased cost of their goods could translate into higher import prices paid for their items. This news is likely one reason why Bond prices have been unable to make any meaningful ground this morning.
Another reason why Bonds have not made a meaningful advance this morning is the overhang of Treasuries to be auctioned this week. At 1:00pm ET today, we get the results from the $38B 3-Year Note auction, which will be followed by more auctions over the next few days.
During the past five sessions, Bond prices have been extremely volatile but have somehow managed to hug the dual ceiling of resistance. This is where Bond prices are also trading so far this morning and tells us that these ceilings are formidable. We can begin the day by floating, but the odds are that prices will eventually move back under these ceilings.