Today’s market is singing a Sonny and Cher tune, “and the bid goes on.” Just when it looked like the Emerging and European markets were headed for a faster paced recession recovery, detours are starting to pop up. Germany’s Industrial Production index dropped unexpectedly, Moody’s downgraded all six government sponsored credits (Dubai), and Fitch downgrading Greek debt are all having a rolling thunder effect throughout world’s fixed income markets. Stocks got lit up from the get go, down over 100 on the big board. All of the above has given investors a reason to buy treasuries as flight to safety, especially into yearend. Mortgage backs have been goosed higher as well with the 4.50% coupon (4.75% to 5.125%) rates better by 8/32’s.
A couple of hurdles still are in front of us. 80 something billion of cash management, 1 month, and 3 year notes hit the auction block today followed by 10 year notes and 30 year bonds Wednesday and Thursday. Another pothole is that the buying overnight has taken prices (10 year note and MBS) right back to the 8 day moving average and 50% fibo retracement level. Given the fact that bearish trend signals still exist (time frames not in harmony), today’s early gains can fade as fast as they presented themselves. Overall, we like the market if for no other reason that investor fear will keep a bid in treasuries which in turn will support mortgage backed securities. Just remember that directional changes can be like playing “crack the whip.” Most probably outcome will be a triangle formation on the 10 year note chart, keeping mortgage pricing in a fairly tight range until the new year.