Bonds Now Improving

Mortgage bonds were sharply lower at the open with the combination of today as the first day of new a month and a new quarter, and a weak Japanese bond auction being pointed to as the culprits.  However, the ISM September Manufacturing Index came in at 47.8, which was well below the forecast of 50.1 and 1.3 below the previous months reading.  A read below 50 signals contraction, and that is coupled with the lowest read since June 2009.  This adds weight to the coming recession argument. Construction spending fell short of its forecast as well, coming in at 0.1 versus the 0.4 target.  This suggests a slow down residential projects.

These reports caused markets to shift direction within minutes, with the Dow dropping 300 plus points and mortgage bonds moving into the green.

Currently, mortgage bonds are above their 25 and 50 day moving averages, and the 10 year treasury is just below its respective averages.  If they can hold and close above and below these levels, interest rates maintain that chance to improve and move lower.  We will maintain a locking bias to capture the gains made for short term transactions and a cautious float stance as long as bonds hold above their moving averages.