28 Jul Be careful if you choose to float
Mortgage bonds received a boost yesterday after the Federal Reserve announced that rates would hold steady for the time being. Given that virtually every large investor knew that the Fed would again sit this one out, it was surprising to see such a strong reaction to the news. However, the tone of the statement made in the release was a bit more hawkish than the previous release. The report mentioned that employment continued to strengthen and overall risks to the US economy have somewhat diminished. The Fed feels confident that we are on the right track, which somewhat opened the door for a small chance of a rate hike when they meet next in September. We feel that is highly unlikely and that chances are high that there won’t be a rate hike in 2016 at all.
Mortgage bonds were able to break above their 25 day moving average yesterday and have so far remained above in early trading this morning. This is a significant move for mortgage bonds and a good sign for the near term direction of interest rates. Of further significance, the bonds have broken out of their narrowing channel that was driving bonds both higher and lower at the same time.
With mortgage bonds now pushing higher, there is no need to immediately rush to lock. However, with the remaining news due before the week’s end, be very careful if you choose to float. You could be missing out on an opportunity to take advantage of great pricing.