Friday May 1st 2009

Mortgage Bonds are trading lower today after failing to stay above support at the
25-day Moving Average. A look at yesterday's candle on the Bond Page
shows both long upper and lower wicks, illustrating wild intra-day trading. Prices
bounced around, hitting both the 25-day MA ceiling of resistance, and support at
the 50 and 100-day Moving Averages.
But so far this morning, although lower, Bond prices have successfully tested a
triple layer floor of support, marked by the 50 and 100-day Moving Averages, as
well as some previous lows. This strong floor of support could help prices from
getting much worse, but it is important to remember that there is a lot of influential
news coming next week, along with huge supply of Bonds being auctioned, which
could push prices below this strong floor. And if prices do break beneath this floor,
we will likely see another 75bp deterioration before the next level of support is
found. That said, we will Float for now, as we watch to see if this strong triple layer
of support holds.
Stocks are slightly lower so far this morning, but they did post strong gains in
April. In fact, the S&P 500 had its best month in nine years, gaining 9.4%, led by
the financial sector and thanks to Congress and FASB for fixing Mark-to-Market.
Speaking of the financial sector, the Fed is going to delay releasing the banking
stress test results. It appears that there may be some discussion as to the
conclusions of the findings, as well as how the information is released to the
public. It's always difficult to speculate as to the exact reasons why this delay
would take place, but it is possible that this open dialog shows a willingness for both
sides to get this right.
The New York Fed reported that it purchased $23B in Mortgage Backed Securities
from April 23 through April 29 bringing the year-to-date total to $400B out of the
$1.25T. Of note, the Fed did for the first time purchase FNMA 3.5% Bonds - but the
amount purchased was miniscule and insignificant. We will be seeing if the Fed
dips in to buy more 3.5% Bonds as that could help rates improve modestly from
these levels.
Yesterday, the Economic Cycle Research Institute (ECRI) said that the current
recession and longest post war will probably end by the time the summer is over.
The ECRI, whose leading indicators have a solid track record of predicting turns in
the business cycle, said that enough of its key gauges have turned upward to
indicate with certainty that a recovery is coming. This is comforting news and yet
another reason why mortgage rates are not likely to improve significantly.
Consumer Sentiment came in at 65.1, a bit better than the expected 61.9. As we
have been saying, this appears to be a result of the improvement in Stock prices.
Additionally, the Institute of Supply Management (ISM) Index arrived at 40.1, also
better than expectations of 38.4.
As we've mentioned, keep your eye on the S&P500 Index, which is at a pivotal
juncture around 875. A convincing move above this level could push Stocks higher
by another 8%, but a failure to break this level could trigger a sell-off of at least 5%.
And as we know, this will likely have an influence on Mortgage Bonds.