Our benchmark FNMA 6.0% mortgage bond put in another volatile day, trading in a 100bp trading range before falling 53bp to close at $100.28.
The bond was unable to hold support at the 100-day MA at $100.78.
Mortgage bonds tried to catch an early bid with some safe-haven bond buying following continued unrest in global stock markets, but they were unable to avoid indiscriminate and forced selling from hedge funds and other investors being hit with margin calls.
Added bond supply in the form of $6 billion in 5-year Treasury Inflation Protected Securities (TIPS) helped to weigh on bond prices.
Foreign participation in the TIPS auction came in at 23.7%.
Stock markets in Europe and Asia opened this morning with large losses before recovering most of what they lost by the close as the ‘Yen Carry Trade’ unwound once again.
Hedge funds and other large traders bought Japanese yen to cover their positions causing a 13-year high surge in the currency against the U.S. dollar.
They are doing this to pay back Yen borrowed at half a percent that was used to buy higher yielding U.S. dollar and other foreign currency denominated assets.
When the value of these other assets declines or foreign currencies weaken against the yen, it forces these trades to unravel.
Japan’s Nikkei 225 index responded by plunging to its lowest level in 26 years while our stock market bounced all over the map with a 452 point trading range in the Dow Industrials.
The Fed is watching this market turmoil play out and is expected to drop its Fed funds rate anywhere from 50 to 100bp this Wednesday when the FOMC announces their latest monetary policy decision.
Fed rate cuts usually weaken the dollar and cause long-term bond prices to fall while yields and mortgage rates rise.
New Home Sales were reported higher than expected at 464,000 in Sept. vs. 450,000 forecast but were still 33% lower when compared to sales in Sept. 2007.
Unsold new home inventory declined a record 7.3% to its lowest level in four years at 394,000.
This is a 10.4 month supply at the current sales pace and double the inventory level during more ‘normal’ market conditions.
The median sales price dropped 9.1% lower during the past year to $218,400, the lowest price in four years.
In the credit markets, one-month dollar-based LIBOR rates rose slightly today at 3.52% from 3.516%.
The Dow was hit with a wave of selling 10 minutes before the close to lose 203 points to finish at 8,175.
The broader S&P 500 Index fell 27 points to end at 848 while the NASDAQ Composite Index lost 46 points to close at 1,505.