Risks favor: Floating

Current Price of FNMA 5.5% Bond: $99.50, +53bp

Bonds are once again trading higher as investors seek some safe haven during the political turmoil in Pakistan. The concern is a destabilization of the Pakistani government due to the assassination of Pakistan opposition leader Benazir Bhutto, and ultimately, the question of which political faction may end up controlling its nuclear arsenal. This is a great example of how unforeseen geopolitical events around the world can impact our rate sheets.

In economic news this morning, the Chicago Purchasing Managers Index (PMI) for December was reported at 56.6, which was higher than expectations of 52. This was good news for the economy, but it wasn’t enough to help Stocks improve, which have given up their earlier gains.

New Home Sales in November were reported at 647,000, which was lower than expectations of 715,000. The number of new homes available for sale dropped to 505,000, the lowest level in two years – however, the pace of sales dropped even more, causing the inventory of unsold new homes to jump to a lofty 9.3 month level. Not unusual to have lower paced sales during the winter months approaching the holidays – but still an indicator that the housing market remains soft. The median home price from November 2006 to November 2007 fell just slightly to $239,100. On this weaker than expected housing news, Stocks moved lower and Mortgage Bonds traded even higher.

The Bond has now broken back above the 50-day Moving Average, which is a good sign. Additionally, the long-term uptrend remains intact. The next ceiling of resistance lies at the 25-day MA, which is where Bonds are trading at the moment. We will continue to float, but again be ready to lock as the recent volatility could send prices lower in a hurry.