Risks favor: Cautiously Floating, as 200-day Moving Average support is tested

Current Price of FNMA 6.0% Bond: $100.09, -3bp

Mortgage Bonds are trading slightly lower, and right at important support at the 200-day Moving Average. Commodity prices, including gold and crude oil continue to move higher, which is a concern for bonds because of inflation pressure.

There are no economic reports set for release today, however, there are a few Federal Reserve officials scheduled to speak. Dallas Fed President Richard 'Loose Lips' Fisher is speaking this morning. He has been known to almost uncontrollably blurt out remarks about the state of the economy or Fed. Also on the “soap box” is new Chicago Fed President Charles “Call Me Chuck” Evans, who speaks at 12:30pm ET. And even Fed Chairman, Ben Bernanke will be giving a talk on education at 1:00pm ET. There will be a lot of interest in the pits on what these officials say about inflation, since it is the fear of inflation which has been applying selling pressure on the Bond market.

Speaking of inflation – this Friday the Core Personal Consumption Expenditure Index (PCE), the Fed’s favored gauge of consumer inflation, is set for release. Economists are expecting the August read to come in at 0.2%, which would leave the more closely watched year over year Core rate within the Fed’s target zone of 1 to 2%. Although the Report will give us a look at inflation before the last Fed cut, it will give the markets a baseline to compare any move up in inflation from the Fed’s actions.

We would like to see if prices can remain above the 200-day Moving Average, and for this reason we recommend Cautiously Floating until this floor is convincingly broken.