HOLY SMOKES!

FNMA 4.5% fell 38 bps...and is trading in the $99 dollar range again. This is after being as high as $100.62 recently. Watch for some "bounce" tomorrow.

30 year rates are still in the low to mid 5's on the 30 year though.

Reports this morning indicate that the Employment report coming out Friday will not be too Good...which provided lift to bonds early in the session.

HOWEVER, when the Feds announced that they are peddling another 75 BILLION dollars worth of bonds next week AND an increased offering of "TIPS" which are inflation protected investments: the bond market took a turn lower. Really it is as simple as
"supply vs. demand" but here is another layer to consider.

Perspective: Investors see the "threat" of inflation even through reassurance that it will be "contained." With inflation: fixed income investments are less valuable vs. investments with a return that INCREASES with inflation.

Example: if a person could purchase a barrel of oil for 71 dollars...and "inflation" went rampant...they could "sell" that barrel of oil for many MORE US dollars... because it would take more dollars to buy a barrel of oil with inflation. "Things" in general would be more expensive due to production cost, currency conversion etc.

If that person took that same 71 dollars and had it returning a "fixed" amount... the "fixed" amount would be worth less when they went to buy something with it. Inflation protected investments actually INCREASE the amount of return based on the value of the US Dollar.

Feel free to call or reply if I am not doing a good job explaining that.

SO: With the "threat" of inflation: the feds offer "inflation protected" investments to investors. Would you rather buy something "inflation protected" next
week or put your money into all the government offerings (T-notes) OR invest in Mortgage backed securities? Investors choose the feds. This is in part what happens.

Dow closed LOST 39 points and OIL is up 55 cents to $71.97.

Have a good night!

Chad