Yesterday, Bond prices edged lower after the Fed left the Fed Funds Rate unchanged at 5.25%, while confirming in its Policy Statement that inflation remains its leading monetary concern. In the Fed’s brief statement, there was little to no commentary on the “credit crunch” situation facing the mortgage industry. Although the Fed didn’t have much to say on the situation, many others are speaking out about it – including Senator Chuck Schumer, who is calling for a temporary lift of the FNMA and FHLMC limits, so that they can accommodate a larger number of loans.

Additionally, there is some saber-rattling going on, which could eventually become a game of “chicken” between the US and China. In response to the US threatening trade sanctions against China , China is threatening to dump a large amount of their $1.3 Trillion of US Bond holdings. The result would be higher rates, as an already fragile Mortgage Bond market would have to scramble to sop up the added paper in the marketplace. We feel that this scenario is an unlikely one, as the drop in price would hurt the amount received by China on selling its paper and dramatically reduce the value of their remaining holdings. And from a strategic perspective, it would be very unwise to telegraph such a move in advance.

Later today, the Treasury Department will be auctioning off $13 Billion of 10-yr notes. This added supply could pressure Bond prices lower, if it is not met with ample buying as well as strong foreign appetite.

Technically – there are some negative signals appearing, as Bonds now have a negative Stochastic crossover from an overbought state. Additionally, Stocks appear poised to make another move higher - therefore, risks now favor locking.