Mel's Blog

Cold weather in February didn't freeze Housing Starts, as New Home Starts were reported at 1.525 million homes, greater than expectations of 1.445 million.  Building Permits were reported at an annual rate of 1.532 million, just slightly below expectations of 1.55 million.  The media is already spinning the lower than anticipated Building Permits as the end of the world as we know it...but we feel this decent report tells us that the housing market is continuing to show stabilization.  Good news for Bonds today, as the recent “unwinding” in the Japanese Yen carry trade may go on pause for awhile.  Late yesterday, the Bank of Japan (BOJ) decided to keep its benchmark interest rate (like our Fed Funds Rate) on hold at 0.50%.  In fact, if the currency markets and hedge funds believe the BOJ will keep their funds rate on hold for the foreseeable future, the Yen carry trade could resume, as Yen carry traders borrow on the Yen at 0.50% and then invest the money at higher yields in US Bonds.  This trade appears to make sense, unless the Dollar weakens against the Yen - in which case, the loss of valuation in currency would outweigh the gain in yield.     

So while Bonds are up modestly this morning, tomorrow's Federal Reserve rate decision and Policy Statement is what Traders are looking ahead to.  With all of the recent volatility in the Stock and Bond markets due to subprime lending concerns, there is chatter that the Fed may throw the markets a bone with a delicate signal or change in bias indicating the Fed may be more open to cutting interest rates this year if the economy shows signs of faltering.  We don’t see this scenario happening at the present time, as the Fed's primary concern is inflation...and inflation has been stubbornly persistent, remaining above the Fed’s target zone.  We believe the Fed will continue to hold the Fed Funds Rate at 5.25%, and while their statement will likely be a reminder that they are remaining vigilant, we don't believe they will signal that a rate cut will be in the near future.      

Bond prices are presently in a holding pattern ahead of tomorrow's announcement at 2:15pm ET, and have been trading in a range between a ceiling of resistance at $99.41 and a floor of support at the 25-day Moving Average at $99.11.  With Bond prices squarely in the middle of a range, and Traders not likely to take much action one way or another going into the Fed announcement, we advise floating into the Fed Policy Statement at 2:15pm ET because we would still have the ability to protect pricing if the statement shakes the market.