Update 5/21/10
Risks favor: Floating
Current Price of FNMA 4.5% Bond: $102.53, +16bp
Bonds are higher again this morning, as Stocks started the day with another round of selling. The sharp sell-off in the Stock market has certainly helped Bond prices of late, as some of the money from Stock sales is finding its way into the Bond market, including Mortgage Bonds. And a closer look at the Stock sell-off shows that some important technical damage has been done. The important 50 and 200-day Moving Average floors of support have been broken on all the major indices. And earlier this morning, the low of May 6th – that wild day two weeks ago that regulators are still scratching their heads about – was broken on the S&P 500. But since then, Stock prices have improved back above those lows, and are trading near flat on the day.
Another point on the Stock market is that prices are now down more than 10% from their peak. This is significant because it is called a correction, if prices recover and resume their uptrend. A correction can be quite healthy, and help a Bull market sustain its strength. But here’s the trick – if the market drops 20% from its peak, it’s officially considered a Bear market. That means every Bear market was once potentially just a correction.
And that’s exactly where the Stock market sits right now – and so the debate rages on. Is this a time to buy, because you believe it’s a correction, and prices will move much higher? Or is this a time to sell, before the correction turns into a Bear market? The answer should become clearer over the next few days, as the markets decided direction takes hold. Waiting in the wings are Bond prices. A Bear market could help Bond prices improve a bit more, while a correction back to a Bull market will be at the expense of some of the recent gains that Bonds have enjoyed.
(A quick side note – why “Bulls” and “Bears”? It’s all in the way they attack. Bulls attack by an upward thrusting motion with their horns, and Bears attack by moving their powerful claws in a downward motion.)
The Senate passed the controversial Financial Regulation Bill last night by a vote of 59 – 39, filled with sweeping changes for the financial world. The Bill must still be reconciled with the one passed by the House before being sent to the President to sign into law. The purpose of this Bill is to address the financial crisis that had occurred in 2008. There is actually a committee that is studying what had caused the financial crisis, and they are due to present a detailed report and explanation by the end of this year.
One of the reasons why this Bill is so controversial is that many feel it would be prudent to wait for these findings before passing regulation. Either way – these new laws often wind up having many unintended consequences which will have to be dealt with down the road. There are also many potential impacts on the mortgage industry – and it is very important to stay tuned to our regular legislative updates coming from our partnership with Bill Kidwell and IMMAAG.
The Treasury will auction off $42B of 2-Year T Notes, $40B of 5-Years and $31B of 7-Years set for next week, which is $5B less than similar offerings as a total.
For now, we can continue to recommend a Floating bias as the direction in Stocks plays out.