Bracing for the Fed

Bracing for the Fed

Even in the face of yesterday’s massive sell off in the stock market, mortgage bonds remain unable to break above their 25 day moving average. This ceiling has firmly been in place since early September, and could continue to drive mortgage interest rates higher as it slowly trends lower. The only way to avoid this is for bonds to gain the strength needed to break above this critical level. With the Federal Reserve slowly stepping out of purchasing mortgage bonds, the headwind against interest rates continues to strengthen, lessening the chances of a meaningful breakout. Further, with the Fed set to raise short term interest rates tomorrow, it seems unlikely that today will provide much hope for an improvement.

Markets are preparing for the possibility of the Fed increasing their interest rate hike projections for 2018. Heading into the year, markets were planning on three rate hikes. However, given recent growth in the job market combined with higher inflation projections, the odds are increasing of additional hikes. If this is in fact announced today, mortgage bonds would likely be negatively impacted; at least in the short term.

Yesterday’s stock tumble was fueled by challenges within the tech industry, mainly FaceBook. It appears there is a possible data breach where FaceBook is selling information to third parties. Although most of us have heard of such rumors and speculations, it seems likely to be true. With markets looking to open Flat for the most part, it will be interesting to see how the day plays out.

Until bonds are able to break above their 25 day moving average, we will maintain our locking bias.