About Five Minutes Ago, news was released that the FED will set up another one of their popular term auction facilities which will lend up to $200 billion in Treasury Securities. Basically, a cash injection to the capital markets.
What does it mean to us? This puts money into the bond market. You'd think it would be go good for rates in that sense, but what tends to happen in the immediate wake of announcements like these is a stock rally, and although we can only discuss stock futures at this point in the morning (as the exchanges are not open yet), that is exactly what's happening. Dow Futures are up sharply on the news.
Mortgage Backed Securities (MBS), immediately dropped about 8/32nds with the 5.5% coupon down to 98-8/32nds, and although some rebound is occurring now, it is volatile. The bigger story is the 10 year treasury which has dropped over 32/32nds so far this morning.
So why is the Dow going up by 200 points this morning (or it should after the market opens), while bonds are worsening? Although liquidity is good for the bond market, it is as least as good for our general growth outlook. Since growth concerns are one of the biggest factors dragging us down right now, when the market's fears are allayed even to a small extent on that topic, it creates investor confidence. It's this "outlook" that brings money back into stocks regardless of the fact that the news is also good for bonds.
More analysis to follow shortly after the open, but I just wanted you to be aware of some of the Pre-Open action. Looks like the MBS may open in negative territory, but not by a big margin. Stay tuned.