Monday 6/16/08 ......... Traders Reluctantly Buying Bonds

By: Matthew Graham •
In A Word:

"Clean up your room and you can go play..."  When we were kids,  this usually did get us to clean our rooms, but it couldn't prevent most of us to do so with  an almost super-human level of reluctance.  Well, today's economic data has asked bond traders to "clean their room" (do some buying), but they are still protesting that "none of the cool kids are doing this."  The cool kids these days are the inflation hawks and they are dominating the tenor on the street.  Despite weaker than expected data, the sell-off on Friday, and a lackluster opening for the Dow, both MBS and treasuries are having a hard time getting off the ground.

The Why:

The downward momentum for bond prices is impressive.  More an more Fed speeches, economist commentary, and plain old fear of the boogie man, have traders running scared from fixed income.  There's a feeling that bond traders have had their head in the sand as far as inflation.  It was almost as if they could ignore inflation as long as the economic data was weak enough and still buy bonds.  That sentiment has taken all of a week and a half to dramatically shift.  With higher inflation expectations to deal with, traders are wanting to position themselves to weather the storm of weak inflation adjusted returns on their current holdings.

To Lock or Float?

Until otherwise noted, we should have an obvious predisposition towards locking, due to the above sentiments.  If we can get back on a stable path of balance in terms of economic data versus inflation concerns, we will be able to notice the price action in bonds start to make sense again.  But as of this morning, it doesn't, it hasn't, and who knows how long it won't!  Most lenders have not released rates yet today, so if you want to "ride the snake," go for it.  We should be able to see any potential reprices for the worse coming a ways off at this point.  But this assumes you can watch treasuries closely for cues, and refresh this blog often.  (Someday...  Hopefully some day very soon, you should be able to receive automated alerts from us, and oh so much more).

The Numbers:

 

6.0% FNMA OTR is dead even with Friday's close currently

6.5% FNMA OTR is better by 3/32nds.

both of these figures are down appreciably from their highs this morning with apparently no hard data to back up the selling. 

Here's a Graph of yesterday and this morning's price action.  Notice the nice gains we had from 5AM to 6AM, and notice us giving back all of those gains by 7AM.  Ouch...

 

The News:

  • Empire State MFG Survey
    • Much weaker than expected: -8.68 versus consensus of -0.50
    • Though this gave a bit of a lift to the curve early, but as you can see, we've sold back off to roughly even on the day

Conclusion:

Not much to conclude here that isn't already apparent.  Fed funds futures are pointing to a potential increase in PRIME.  Everyone and their brother is saying that a blind eye has been turned to inflation in lieu of weak economic data.  AND inflation seems to be waxing as opposed to waning.  All this amounts to a very hostile environment for fixed income.  You can't go wrong with locking at any point between now and the time MBS start to show some resiliency.  Again, we don't know how long that will take, but most experts' guesses are "not soon."  Still, you can successfully float today, IF you pay close attention., but that is by far the riskier of two paths, and I'll be surprised if the potential gains justify the risk.