The Mortgage Manifesto

As the Market Turns

As I do my ritualistic daily scanning of stock and bond trading charts my eyes see the indexes clinging to key technical support and we all await news from the FOMC on Thursday and inflation data reported on Friday via the Personal Consumption Expenditure (PCE) report.

My gut tells me we are at a major inflection point for the equity and bond markets.  Will this be confirmed by week end?  We will just have to see.

In fact, members of my stock trading excellence program, Tidalwave Trader, have been moved into a 100% cash position.  This is a very rare occurrence and is indicative of the need for extreme risk management for the current market.  I offer a 60 day free trial and we'd be more than happy to spend two months helping you with your understanding of the stock markets.  Check it out at www.TidalwaveTrader.com.

I'll be back with more analysis later this week as we gauge the market reaction to the FOMC and PCE report.

Brett Grendahl

www.BrettGrendahl.com

The Mystery is Unveiled

The recent runup in bond yields is causing many shaking heads as people rack their brains for the cause. 

Let's examine this a bit.

Okay, it's been a year since the last FOMC hike yet their bias is still a tightening one.  Why is this the case while we've seen inflationary pressures slowly easing?  The reason is that as the raised short term rates long term rates have barely moved.  This inverted the yield curve for too much time and they anticipated that long term rates would be higher by the time they had to begin cutting rates again.  As we see core inflation moving within their communicated threshold thank you Greespan and Bernanke for your transparency, their next likely action is to cut their Overnight Rate.  They'd like to insure a little more bang for their buck and decided to normalize the yield curve by talking it there.

The result is a final throwing in of the towel by the markets and that has kicked out any buying sentiment.  However, over time long-term rates should gravitate to core inflation plus 3.5 points.  Currently, that would be about 6.125%.

I anticipate that we will see a bullish bond reaction soon.  Maybe the catalyst will be the first FOMC Policy Statement that moves from tightening to neutral.

What do you think?

Brett Grendahl

www.BrettGrendahl.com

Market Recovery

As noted a few days ago the bond markets reached "oversold" levels and were ripe for a bounce back.

During the past few days mortgage bonds have recoved about one-third of the ground that was lost since the beginning of May.  This is good news but bonds have some strong resistance close at hand.  We will have to watch how they navigate that resistance. 

For the moment we are in a FLOATING bias towards locking any mortgage rate for a closing occuring in the next 30-45 days.

Mortgage Bonds Reversing

Good news finally after many days of swift price declines for mortgage bonds. 

This morning we were watching a key technical support level that coincides with a level that mortgage bonds bounced off of in June of 2006.  It does appear that the worst is behind us and with the Fed commenting in the release of it's Beige Book today that their worries about inflation have not been heightened in recent weeks.  The Minneapolis Fed stated that the district's economy "edged up."

We now look to see what sort of bounce we get from here.  If you watch CNBC and here them use the terms "overbought" and "oversold," well this selloff in bonds in recent days is a great example of what "oversold" really is.  Watch for the market to recover quite a bit in the coming weeks.

www.BrettGrendahl.com

Normalizing the Yield Curve through Talk

Sometimes talk isn't cheap, especially when it comes from Federal Reserve officials!

Last week we saw the bond markets finally crack through a major level of support and the worst several day decline in bond prices in three years.  One of the reasons this occurred is from the market throwing in the towel after Fed officials have been talking more and more about how they might still raise rates.

Yes, it has been almost one year since the last Fed Overnight Rate hike last June and the market has been anxiously awaiting news that rate cuts are on the horizon.  During the past couple of months Fed officials have continually been stating that they might still raise rates even in light of moderating inflation data.

This talk wasn't cheap as the markets finally gave up and we saw long-term interest rates finally spike higher last week.  It is important to put this into perspective as long-term rates are still historically low.  In the 150 year history of interest rates in the U.S. long-term mortgage rates have only spent about 20 years above 7.5%.  That was during the late 1970's and early 1980's when the Cold War closed down global markets.  Fast-forward to today and we have ultra-competitive global markets and businesses have a hard time raising prices.  This keeps inflation in check.

This is what I see that the Fed is up to.  They are "talking" the long-end of the yield curve higher to normalize the yield curve before they move into a NEUTRAL bias towards rates.  As the economy continues to cool and inflation pressures continue to moderate look to see the talk quickly change from rate hikes back to future rate cuts.  What the Fed has done now is set up the yield curve so that their future rate cuts have more "bang for the buck."

Talk, it isn't always cheap.  I guess it just depends on who is doing the talking!

www.BrettGrendahl.com

What the Heck Happened?

Whoa!

The past few days have been the worst for mortgage bonds and mortgage rates in three years.  Thursday morning we saw mortgage rates bump 0.25 higher out of the gate as bond trading started for the day.

What the heck is going on?

The markets are very uneasy and uncertain as to what the Federal Reserve thinks is going on with inflation.  It's been almost a year since the last Fed hike to their Overnight Rate and in the past six weeks comments from Fed officials have increasing been using the "I" word.

This has the market rattled.  A year after the last hike of the longest rate hike cycle we are expecting the Fed to look to lower their rate, not hike it.  Yet, the verbal bias coming from Fed officials has increasing been mentioning inflation.

It appears that the Fed is "jaw-boning" the market to normalize the yield curve, or get short term rates lower than long-term rates.

The good news is that while this market deterioration was swift and viscious the worst appears to be over.  Mortgage bonds plunged lower this morning but have recovered strongly and look to close the day positive.  This action is significant and points to the fact that at price levels lower than where bonds trade this moment there is a big supply of buyers. 

I expect this market pyschology to reverse itself in the coming weeks and months but we all were caught by surprise by the quick change in market sentiment.

www.BrettGrendahl.com

Market Reaction to the April Jobs Report

The April Jobs Report came in higher than expectations.  There was a gain of 157,000 jobs versus the expected 130,000.  However, the March report was revised down from 88,000 to 80,000.

So, the 20,000+ higher reading this morning is offset by the 20,000- miss last month.  Put these two months together and the average is right at expectations and still slightly below the ideal 150,000 gain per month.

Mortgage bonds are suprisingly down this morning a lot more than I'd expect given the numbers of the past few months.  This tells us that investor pyschology in the bond trading pits has become extremely bearish with anticipation for some clue to a Fed rate cut in the future.  The mixed news of late along with Fed commentary that still mentions inflation is keeping the bond markets in a funk.

I fully expect this funk to end with a strong surge higher for mortgage bonds (lower for mortgage rates) but this pyschologically-based worsening trend of the past month has to play out all of it's emotion first.  How long will that take?

That is the million-dollar question.

www.BrettGrendahl.com