Conflict Over Crimea Creating Volatility
March 4, 2014
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Bonds Down -34bps – Nearing Moving Average Floor. The Fannie Mae 30-Year Bond is down -34bps since yesterday’s close. When traders sell off bonds our rates/pricing get worse. More importantly, the bond price has reached a level that is very concerning…it has touched a floor of support and is now testing its strength. I’ll use my Glass Elevator Analogy to explain.
Earlier this morning the bond elevator was heading down to the first floor from traders selling off bonds and then it stopped. But traders want to buy low and sell high…when the bond reached Floor 1 they figured it had reached its low. So, traders started buying bonds again at this low price and the elevator reversed direction and headed back up towards the second floor. So, Floor 1 is now a level of support…we expect traders to start buying at this point, unless some news or report gives them reason to keep selling off bonds. But now the elevator is heading back down towards Floor 1 because traders are once again selling off bonds. The question is, will Floor 1 hold…is it strong enough that traders will start buying again? A trader’s job is to buy low and sell high…as the bond reaches Floor 1, will traders think it’s hit the low and start buying again like this morning? If so, the bond price will reverse and we’ll be safe from rates/pricing getting worse. But if traders continue to sell, and the bond price drops below Floor 1, then you can bet on rates getting worse, probably in the form of a mid-day reprice worsening.
The reason for all this volatility is the overseas conflict between Russia & Ukraine over Crimea, and now the U.S. has gotten into the mix. When military action seemed probable yesterday, traders sold off stocks since global markets were considered a bad bet. Trader’s put their money into bonds instead because they figured it was a safer investment and as a result we saw a little improvement in rates/pricing. Since the U.S. got involved Russia has essentially backed down, at least for now, and for that reason traders felt more confident in investing in stocks. Therefore, they invested into the stock market and sold off bonds to free up the capital to do so…this is what is causing this predicament.