Risks favor: Cautiously Floating

Current Price of FNMA 6.0% Bond: $99.81, +3bp

Durable Goods Orders soared in July, rising by a far greater than expected rate of 5.9% and scoring their largest gain in about a year. Transportation goods such as airplanes, autos, and trucks led the surge, but other long-lasting goods like machinery, computers, and steel products also showed strong demand. When excluding vehicles, Durable Goods increased by a still-strong 3.7%. This report is volatile from month to month, so Bonds didn’t react much on the strong economic news.

Sub-prime news abroad – The Bank of China (BOC) revealed a far greater exposure to US sub-prime mortgage investments than expected. The BOC disclosed about 10% of their US Dollar denominated assets consisted of sub-prime mortgage investments valued at $10 billion. This story will continue to develop.

New Home Sales was reported at 870,000, which was better than expectations of 825,000. The monthly sales inventory came in at 7.5 months, which is less than last month’s reading and well below March’s reading of 8.3. And the median sales price rose 0.6% year over year. Overall a pretty good housing report considering the present landscape in the lending industry.

A number of economists believe the economy is moving toward a recession because of the events in the mortgage and housing sector. We believe the Fed will soon begin to cut short-term interest rates in an effort to help the economy avoid this. With inflation on the decline and now inside the Feds target range, and with the Job market showing signs of moderating, the Fed should have a “green light” for a cut on September 18th.

Bonds are trading in a sideways pattern along key support at the 100-day MA, presently at $99.57. We are continuing to advise floating as the Bond remains above this solid floor of support.