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Current Price of FNMA 4.0% Bond: $103.31, +69bp
Mortgage Bonds are soaring on news that Larry Summers withdrew his hat from the Fed Chairman post paving the way for the dovish Fed Vice Chair Janet Yellen to be the front runner. The markets feel that the current easy money policies will continue with Yellen as the Chairman. Stock futures are also surging on the news.
Supporting the notion that QE3 will rage on…the Empire State Manufacturing Index fell to 6.29 in September down from the 8.2 recorded in August and below the 9.0 that was expected.
The big event this week will be the 2-day Fed meeting that begins on Tuesday and ends on Wednesday with a policy statement being released at 12:30pm ET followed by the 2:00pm ET release of the Fed Economic Projections and ending with a 2:30pm press conference with current Fed Chairman Ben Bernanke. This will be a big day for the markets – stay tuned and be ready to lock as the week progresses.
The current consensus for a September taper is a reduction of a total of $10B – $15B and that could be in just Treasuries or a combination of both. With today’s news on Summers, the markets could have already priced that reduction in and continue to rally if that amount is announced. Any larger reduction, and Stocks and Bonds could both take a hit. The Fed Funds Rate, which is at 0.25%, will not be changed and will most likely remain at current levels through 2014.
Technically, the 4% coupon is trading well above resistance at the 25-day Moving Average ($102.74), which now becomes the first layer of support and is now resting on resistance at the 50-day Moving Average ($103.23). We are Floating into to the Fed meeting as long as the market cooperates.