Bonds Move to Top of Trading Channel

Mortgage bonds did exactly as we anticipated last week, climbing from the bottom of the trading channel all the way up to the top, where they now sit. We would anticipate the next move to be down, which means upward pressure on mortgage interest rates. Both the stock and bond markets will likely trade within the current range ahead of the Fed announcement on interest rates, which we will get next Wednesday. Markets have already baked in at least a ¼% rate cut, with a high probability that the Fed will decrease rates by ½%. This historic move comes in a year where the Fed was expected to hike, which could be a saving grace to the US economy.

Early in 2019, I was certain that the current path the Fed was on would put the US into a recession in 2020. Although I still believe a recession is coming, I don’t think it will be as bad as it would have been had the Fed not reversed course. The key difference in the recovery that we have experienced has been influenced by tech employers such as Uber that are adding lower paying jobs to the economy. The reality is that these types of jobs count as gains in the labor market, but don’t provide the income level to meet the needs of a traditional employee. So, while lower paying jobs help, the labor numbers get more credit than they deserve. I think a rate cut is the smart move. Our economy would be in deep trouble without them.

Since mortgage bonds are now trading at the top of a channel, the smart move is to lock.