Risks favor: Floating with a finger on the lock trigger

Current Price of FNMA 6.0% Bond: $101.19, -19bp

There was no lack of volatility during the past 24 hours, prompting a double alert day! The first was to float, and the second was to lock after improved pricing. After busting through a ceiling of resistance, the unleashed Bond raged higher and reached its best level of the year. But the advance was halted exactly on the next ceiling – a double top, which represented highs from 2-years ago. Bonds quickly bounced lower and prices are currently 34bp below yesterday’s high. Take a look at the Bond Chart in a two-year view…it is amazing to see how prices have created a big “W” and are now pausing exactly at the two-year resistance level.

The big news so far this morning comes from Citigroup, which announced it received a $7.5 billion infusion of capital from the Abu Dhabi Investment Authority. The investment in Citigroup by Abu Dhabi's investment fund will provide Citigroup with much needed capital to offset their large losses from the sub-prime mortgage holdings. This news appears to be helping Stocks so far today, as Abu Dhabi’s investment suggests that this might be a good time to start “bottom-fishing” and buying Stocks. Stronger stocks are causing some selling in Bonds.

Also helping Stocks – Goldman Sachs is forecasting the Fed will have to continue to cut interest rates by 150bp, due to the credit crisis. They are increasing their probability of a recession to 43% from 30% and are projecting the Fed Funds rate will fall to 3.0% by mid-2008. If the Fed does indeed cut this sharply and it leads to inflation, Bonds will not respond favorably. We think the Fed wants to and will cut as long as inflation stays in check. We’ll get a read on the Fed’s inflation gauge this Friday with the PCE Report

The New York Federal Reserve Bank announced it would conduct a series of special repurchase agreements beginning tomorrow, by injecting $8 billion worth of liquidity into the market. The Bank will purchase a combination of mortgage-backed securities, agency securities, and Treasury Bonds. The reason for the New York Fed's unusual repurchase agreement is to ensure adequate liquidity through the end of this year in response to increasing money market funding pressures. We don’t expect these repurchase agreements by the Fed to have a big impact on Mortgage Bond pricing, but it is worth noting what measures the Fed is taking to ensure liquidity in the markets and help calm fears amongst investors.

Consumer Confidence for November was reported at 87.3, which was below expectations of 91.5 and the worst reading since October 2005. This ugly reading is not much of a surprise as the media has almost become a constant stream of negativity about the mortgage and housing market. This may be a good time for us to remind clients that 30-year fixed rates are below 6%, providing a great opportunity to save money and solve some of the issues drawn out in the media.

It was announced today that the conforming loan limit for 2008 will remain at $417,000.

Mortgage Bonds are attempting to stay above support at $101.12. Should prices fall beneath this level, the Bond could fall to the 25-day Moving Average at 100.83 or another 36bp lower. Yesterday’s double alert day seemed to secure the best pricing available in the past two days. So long as prices can remain above the floor at $101.12, we will cautiously float today.