Rate Update December 8, 2008

Interest rates are unchanged to Friday’s though bonds are trading slightly higher on the day

There are no economic reports scheduled for today so it is likely that Mortgage Bonds will react to the Stock Market. Please refer to this blog posting to see how.

Stocks have been building on the gains of late last week as the recent news that Capitol Hill has reportedly liked what they have seen in the latest outline of the auto industry bailout. Also helping stocks is the anticipation of a Fed Rate cut next week where a rumors of a .5% cut has been circulating the past couple weeks. The third variable that we had talked about helping the stock market in the near future, the termination of Mark-to Market accounting, looks to be invalidated but the market likes what it is seeing so far. Maybe traders are figuring that “2 out of 3 aren’t bad”.

This positive trading of the stock market, along with the auction of 3 month and 6 month treasuries being held today at 1pm ET may drag on Mortgage Backed bonds later today. The reason that an auction of treasuries may influence a decrease in prices is because of an artificial supply of “goods” hitting the open market. As these new treasuries hit the market and supply all of a sudden is outweighing the demand for those “goods”, prices may temporarily decrease until the market balances itself out. As that happens, and prices fall, Mortgage Backed Bonds may take a hit and we could see rates increase in the short term. Either way, and as we have gotten used to in the past months, we are certain to see some volatility.

Current Outlook: neutral but ready to lock short-term