Market commentary

With no economic data today the equity and bond markets are being driven by China’s decision to let its currency “float”. The immediate reaction was a rise in value of the Yuan, China’s currency, and a rally in global stock markets. A rise in the value of the Yuan makes goods cheaper inside of China, so in theory, domestic demand will increase. The flip side, however, is that a more valuable Yuan makes exports more expensive, so Chinese goods exported to the U.S. and Europe become more expensive. While this may help U.S. and European manufacturers become more competitive, at the end of the day it makes goods more expensive for U.S. and European consumers.

The rally in the equity markets, as one would expect, has lessened demand for U.S. Treasuries, so we see a decline in bond prices this morning. Mortgage bonds are approximately .25% worse in price from the market close on Friday.

Remember, the U.S. Treasury will auction $40 billion of 2 year notes on Tuesday, $38 billion of 5 year notes on Wednesday and $30 billion of 7 year notes Thursday. In addition to this supply, the Federal Reserve will be meeting to discuss interest rate policy in a two day meeting, which begins Tuesday and will end Wednesday with the Fed announcement regarding interest rates and prognostication for the economy.