Risks favor: Carefully Floating with finger on the lock trigger

Current Price of FNMA 5.5% Bond: $100.25, +9bp

After two days of nice gains, Mortgage Bonds are taking a little breather as prices test a ceiling of resistance at the 50 and 100-day Moving Averages. Stocks are under some selling pressure on news that Germany’s largest Bank, Deutsche Bank, reported its first quarterly loss in five years after writing down 2.7 Billion Euros ($4.2 Billion) in sub-prime related losses.

Today kicks off the two day Fed Meeting and tomorrow the monetary policy decision and statement will be announced. We expect the Fed to lower the Fed Funds Rate by .25%, to 2.00% and this is also what the Fed Funds Futures are presently pricing in.

At 10:00am ET, Consumer Confidence will be reported. Unless the report wildly misses expectations, we don’t expect the market to react too dramatically in advance of the Fed tomorrow. We will float, but very carefully as prices test a dual layer of resistance at the 50-day and 100-day Moving Averages. As mentioned in yesterday’s update, a signal from the Fed tomorrow that the rate cutting cycle is over should help Bonds. But because they are testing resistance, this a very delicate situation. We will float and give the Bond a chance to improve, but be ready to lock should things change in this volatile market.