Cautious float

The bond market experienced another day of extreme volatility on Friday following the announcement by the world’s most famous, largest and richest bond trader.  He stated he will be leaving the company he helped find for a competitor.  Bill Gross, in charge of $2 trillion as Chief Investment Officer at PIMCO, announced that he was joining Janus Capital Group.  Gross helped find PIMPCO 43 years ago, and has since risen to become known as the world’s expert in fixed income asset trading.  Following the announcement, bond holders around the world sold bonds on the market, causing bond prices to tumble.  There has been a high degree of turmoil at PIMCO lately, with managers unsure of Gross’ strong belief that our economy isn’t as strong as perceived.  Time will tell if Gross was right or if those who opposed his beliefs are right.

An extraordinarily high level of volatility in the market continues today, with the stock market dropping lower this morning and bonds jumping higher.  Mortgage bonds opened the day with a gap higher, jumping past the three layers of resistance that have held mortgage rates from improving the past few days.  If bonds are able to maintain their position above these critical points that will be a bullish signal and provide hope that mortgage rates can stabilize or even improve from these levels.

Personal Income and Outlays for August were reported this morning.  Personal Income was up 0.3%, which was in-line with expectations.  Spending was up 0.5%, which was strong, but also in-line with expectations.  It is interesting to note that consumers are spending more than they are earning, which is a positive for our economy.  However, overspending leads to debt which eventually creates challenges.  If home values continue to move higher, it will lead to a lot of consumers refinancing to consolidate consumer debts, which is partially what led to the excessive strength in the economy in the early 2000s.

With CPE showing that consumer inflation is still only at an annualized rate of 1.5%, mortgage bonds have permission to move higher today.  We will suggest a carefully floating bias as we watch to see how strong the rally in the bond market will be.  With stocks under significant pressure again today, mortgage bonds will be supported by the flow of money pouring out of stocks and into the bond market.