29 Apr Fed day: Locking bias
After a terrible day in the bond market yesterday, bonds are following through and continuing their losses. The drop in the bond market is purely
an emotional response ahead of the Fed announcement that is due out early this afternoon. The big rumor of the past nine months has been that
the Fed will raise short term interest rates in the June meeting. This was so widely believed to be true that the probability predictions were
in the 80% range. However, we still do not believe there will be an increase in June. We feel the US economy is in no position to warrant
a rate hike; nor do we feel the economy could withstand a hike in rates. Hopefully the Fed will ease the market of this concern in their statement
so that mortgage bond investors can relax and jump back in to buying mode which will help improve mortgage interest rates.
This morning’s update on Gross Domestic Product (GDP) for YTD 2015 further supports our rationale for not moving rates higher. GDP for the 1st quarter of 2015 came in at 0.2%. This was much lower than the +1.0% expected and nearly as close to a negative number as you can get. The
strong US dollar is partially to blame for this terrible report. A strong dollar makes purchases of US goods and services more costly overseas,
which mainly hurts large international businesses. As the large businesses suffer, the impact flows down and creates a headwind for all businesses.
This should also be a major headwind for the US stock market. However, it seems to be ignorant to the current economic environment and has recently
achieved record all-time highs. This irrational exuberance has also pulled money out of the bond market as more cash flows into the stock market,
which has been a factor in pushing interest rates higher.
Today is a very volatile day. Therefore, floating continues to be highly risky. The Fed statement could cause the direction of mortgage bonds
to move in either direction. There is a chance they will use the recent GDP results to ease the market’s fears of an imminent rate hike.
However, they may also state that the economy is pushing oil prices higher which will cause inflation to move up. Until we see the results of
the statement, we will maintain a locking bias.