Risks favor: Cautiously Floating

Current Price of FNMA 6.0% Bond: $101.12, +6bp

Bonds are trading slightly higher on some weaker than expected economic news this morning.

Durable Goods Orders for September were reported at -1.7%, which was lower than expectations of a 1.5% gain. Additionally, August Durable Goods Orders were revised lower to -5.3% from the originally reported -4.9%. The only bright spot for the report was after excluding transportation orders, Durable Goods recorded a slight increase.

Initial Jobless Claims were reported at 331,000, which was worse than expectations of 320,000 claims. Also, the previous week's number was revised higher to 339,000, from a previously reported 337,000.

New Home Sales for September will be reported at 10:00am ET. Unless the report wildly misses expectations, it shouldn’t be a market mover. Yesterday’s weak Existing Sales report has Traders already prepared for a soft reading in the New Home Sales report.

At 1pm ET, the US Treasury is going to auction off $13 Billion in Five-year Notes. The additional supply could weigh on the market if the auction isn’t well received by investors - especially foreign investors. Yesterday’s auction of Two-year Notes showed decent results and had little impact on prices.

Technically, Bonds are at a high water mark – at least for 2007. The FNMA 30-year 6% Coupon hasn’t closed higher than present levels since December 2006. We want to be patient and see if Bonds can break above close resistance, but after gaining over 120bp in just 9 trading days, we also want to protect these gains. So we will continue to float and enjoy the better pricing, but will have a finger close to the lock trigger should prices show signs of reversing lower.