Phil Grossfield's Blog

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My Market Watch: Bonds Flat – Pricing Same. The Fannie Mae 30-Year Bond is basically flat this morning +0bps from yesterday’s close…par. When traders buy bonds our rates/pricing improve and when they sell off bonds our rates/pricing get worse…the bond tells it like it is…it is a direct indicator…it’s as simple as that. Today it is flat, like a pancake…like a tortilla…like an Iowa countryside.

There are some conflicting reports in housing data and quite frankly it confuses me. For example, purchase applications are down 15% in 2014 but new home sales came in very high…tell me that doesn’t sound confusing. Maybe that’s why the bond is flat today.

In analyzing the 30-year Fannie Mae bond it’s interesting to point out that it was selling off early and dropped down to the 25-day moving average. A moving average is a trend in the buying and selling of the bond. Traders use moving averages to make guesses on when the price of the bonds (and stocks) will reach highs and lows. As you know, traders want to buy low and sell high…if they see the price of the bond approaching a moving average floor, they usually conclude the price has reached it’s low and figure it’s a good time to start buying, unless of course there is some compelling report or news to suggest otherwise.

Early this morning the bond dropped down to the 25-day moving average…then it stopped and headed back up. I created the glass elevator analogy to explain this. Imagine the glass elevator is heading downward towards the Lobby. As the elevator nears the Lobby it slows down and eventually stops…will it go down to the garage or reverse and go up to higher floors in the building? If there are no economic reports or news to suggest the elevator should continue heading downward towards the garage, then traders will push the “up” button (buy bonds) and the elevator will reverse and go up to higher floors…this is what traders count on…this is why they start buying bonds at the lobby. The lobby today is the 25-day moving average.

As of now the bond is trading well above the Lobby…this is a very good thing. As long as the bond doesn’t fall below the Lobby, then rates/pricing will hold. Let me know if you have questions or comments…