08 Jun Be very careful if you choose to float
After a brutal day on Friday, mortgage bonds are starting the day looking for a bounce higher. Once mortgage bonds broke beneath the long term upward
channel that had been in place since September of 2013; the losses accelerated. This is a common response to a trend reversal in the market,
as bonds are quick to form a new trading pattern. Unfortunately, bonds no longer have the uptrend channel to help support continued lower mortgage
interest rates. Unless bonds are able to break back into the channel, we will likely see a slow but steady grind higher in mortgage rates.
This move has widely been predicted by most large financial brokerage traders. However, given the state of the global economy, a raise in interest
rates will create an additional headwind for continued economic growth which the market may not be able to stomach.
This week’s economic calendar heats up as the days roll by, with the highlight reports coming on Friday. We will receive the Producer Price Index
as well as Consumer Sentiment. Since the Fed has set inflation as one of their primary benchmarks to determine when to raise interest rates,
every report dealing with price movements is heavily scrutinized. Although the Producer Price Index measures inflation on the manufacturing level,
it can still be an early indicator of the direction of prices at the consumer level. Therefore, if it shows a reading higher than expected, the
market’s reaction may be over exaggerated, causing mortgage pricing to further deteriorate.
With bonds moving higher so far today, there is no need to immediately lock. However, the general recommendation in a downward trending mortgage
bond market is to lock. There may be short term opportunities to float in hopes of slightly improved pricing. However, be very careful
and do so only when watching the market closely and being in a position to lock should sentiment change.