Risks favor: Cautiously Floating as Bond approaches 50-day Moving Average

Current Price of FNMA 5.5% Bond: $98.91, +28bp

Mortgage Bonds opened the day sharply higher on news that Pakistan’s opposition leader Benazir Bhutto, was killed. Hundreds of people had gathered at a political rally that was attended by Bhutto and at least a dozen other people were also killed in the attack.

Also adding a boost to Bonds were a couple of weaker than expected economic reports. Durable Goods Orders for November was reported at 0.1%, which was well below expectations of 2.2%. And after excluding volatile transportation orders, Durable Goods fell 0.7% for the month of November. Durable Goods is a volatile number month to month, but the longer-term negative trend in this report does suggest that business investment is slowing.

Initial Jobless Claims increased by 1,000 to 349,000, which was higher than expectations of 340,000 claims. This leaves the closely watched four-week moving average for Initial Claims at 342,500. As we mentioned last week, a four week moving average above 360,000 could signal an oncoming recession.

But then Consumer Confidence for December was reported at 88.6, slightly above expectations of 87.0. On the news, Mortgage Bonds gave up some of their earlier gains.

At 1pm ET, the Treasury Department will auction off $13 Billion in 5-Year Notes. The added supply may put a lid on the Bond's advance this afternoon. Yesterday we saw bond prices move lower on sour auction results in the 2-Year Note.

Technically, the Bond Market is extremely volatile as the low-volume holiday environment has helped to create large intra-day price swings. This morning’s rally had helped Bonds climb back above the Rising Trend Line. We will cautiously float and see if prices can hold their gains.