Last week in review – (March 7 – 11, 2011)
Shaun Meller is a mortgage professional at Bank of America specializing in financing for Manhattan condos, co-ops, and townhomes.
First, let us extend our deepest sympathies to the families affected by last week’s earthquake and tsunami in Japan and our hope for a speedy recovery. The earthquake was a magnitude of 8.9—the strongest in 140 years. The earthquake in Japan and its damage created some counterintuitive market reactions.
Ordinarily, U.S. Treasuries and mortgage bonds would trade higher in the face of devastating natural events that drive money into “safe haven” trades. But in this case, buying of Treasuries and mortgage bonds as a safe haven trade was offset by the Japanese selling some of their own massive holdings of Treasuries and mortgage bonds in order to repatriate money back to their country during this time of emergency. Considering that Japan is the second largest holder of U.S. debt at $877 billion, selling just a small portion of their holdings has an impact on bond prices.
In addition, bond prices traded in very volatile fashion last week after getting jockeyed around on news out of Saudi Arabia that police had opened fire on protesters with rubber bullets. Let’s look at how this influenced the markets in a different way than one might at first imagine.
Oil fell last week, despite the news out of Saudi Arabia. Why? Shouldn’t unrest in Saudi Arabia – the world’s largest oil producer – push prices higher? Yes, but that news was offset by the earthquake in Japan. That’s because Japan is a huge importer of oil, and the market senses that the earthquake and subsequent tsunami may create an economic slowdown and diminish the demand for oil.
Seeing that mortgage bonds are lower – even in the face of weak stocks and enormous uncertain global news – tells us that the gains in bonds are not coming with a lot of conviction, and traders are selling into this strength. This is because a lot of headwinds remain for bonds – like inflation abroad, rising government debt and continued QE2 purchases.
In the news this week (March 14 – 18, 2011)
There are multiple reports this week focusing on the same segments of the economy. We’ll talk about these reports next week and their impact on the bond market:
- Federal Reserve report
- Tuesday – Federal Open Market Committee releases policy statement
- Housing markets reports
- Wednesday – Housing Starts and Building Permits
- Manufacturing reports
- Tuesday – Empire State Index
- Thursday – Philadelphia Fed Index
- Thursday – Capacity Utilization
- Thursday – Industrial Production
- Employment reports
- Thursday – Initial and Continuing Jobless Claims
- Inflation reports
- Wednesday – Producer Price Index
- Thursday – Consumer Price Index
As you can see by the arrows in the chart below, bond prices experienced some up-and-down volatility last week, but ended the week near where they began.
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