Risks favor: Cautiously Floating

Current Price of FNMA 6.0% Bond: $99.00, -9bp

Mortgage Bonds are trading a little lower after the Commerce Department reported the advanced second quarter GDP growing at the quickest rate in a year coming in at 3.4% and hotter than expectations of 3.2%. Stocks, which were punished yesterday, reversed their pre-market losses on the GDP release and this improvement in stocks hurt Bond pricing. The Bond was also pushed back below a ceiling of resistance at the 50-day Moving Average and this is something we are watching very closely to see if this morning’s modest sell-off in Mortgage Bonds gains momentum.

The Michigan Consumer Sentiment was reported at 90.4, which was just slightly below expectations and had little effect on prices.

Right now it is all about technicals and stocks. The Bond is testing resistance at the 50-day Moving Average and how the Bond performs near this ceiling will likely be influenced on what happens in the Stock market. Should stocks rebound after yesterday’s sell-off, the Bond could have difficulty breaking above this ceiling. However, should stocks continue to come under selling pressure, Bond pricing could benefit. We want to be patient and see how stocks perform and give the Bond a chance to trade back above the 50-day MA, so for now we are cautiously floating, but be ready to lock as the picture could change quickly in this volatile market.