Market Analysis

Bonds are improving today.  While technical analysts have been expecting a correction from the massive sell off in bonds they warn that the improvement today may be primarily due to purchases by large investors who sold bonds short on their way to the current lower prices (higher yields/rates).  We can looks at a Fannie Mae 4.0% 30 yr mortgage-backed security (MBS) as an example.  The price of this instrument was 103.562 on 11/5.  That meant that you paid $103.562 for a bond with a face value of $100 and a yield of $4 per year in interest.  On Wednesday the same $100 bond was trading for $97.078.   On the way to $97.078 large trading firms sold bonds that they did not own with the requirement that they buy those bonds at a later date (at which point they "bet" that the price would be lower).  Today, many of those trades are being "cashed in" and the  "paper profits" are being converted into real profits.  As an example, on the way down in price (higher in yield), a trader may have sold the MBS at a price of $101.  They are now scrambling to buy them back at a price near the $97.  Already this action has moved the price back up to a price of $98.50 which is why 4.875% has come back onto our rate sheets.  However, this trading action does not necessary represent a short, medium or long term outlook change for bonds.  As such, floating in a market like this one can be risky.

In economic news today, the Conference Board's November Leading Indicators index came in up 1.1% which matched expectations.