Current Price of FNMA 5.5% Bond: $96.47, -65bp
Extremely ugly start to the morning, as Bonds plummet to lows not seen since July of last year. As we have been saying over and over, when Bonds fall beneath important floors of support, prices are primed to get worse in a hurry...particularly if the news is Bond unfriendly. This is exactly why it's imperative to stay tuned to the Bond Page, and be aware of those important floors of support.
Here's what happened today. This morning, New Zealand's Central Bank - their equivalent to our Fed - unexpectedly hiked rates in an effort to cool down their strong economic growth and fight inflation. There is talk that Australia may follow suit in short order, and this is all on the heels of the European Central Bank hiking just yesterday.
Why does this matter to our Mortgage Bond pricing? As nations around the world hike their own rates higher, international investors who are seeking the highest rates of return on their money may increasingly look to invest elsewhere besides the US, and may even pull money from their present US-based holdings. So as demand for our US Bonds decreases, prices will move lower - as any item will move lower in price when demand for it is diminishing.
In yesterday's Daily Update, we feared that if the Bond broke below the floor of support at $97.09, then prices could drop an additional 170bp before finding the next clear floor of support. One look at the Bond Page shows this is exactly what happened after the powerful 200-day Moving Average floor of support was broken, which is why we've been advising to lock ever since it appeared that floor would break. And for now, Bond prices unfortunately look to be on a fast track lower to that next floor of support, nearly 100bp lower than present levels.
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