14 May Floating bias
Despite a higher reading on inflation, mortgage bonds came out of the gates strong this morning. The stock market reached a new peak yesterday, fueled by strong tech stocks and continued optimism in our economic recovery. In addition, the 10 Year Treasury Note yield has dropped below a critical floor, and is now at 2.55%. This bodes well for mortgage bonds today, and will help to push longer term bond prices higher. With the stock market struggling so far this morning, it appears to be a good day for fixed income investments overall.
Producer Price Index (PPI) for April was released this morning, showing a hotter than expected 0.6% increase. This is well above expectations of 0.2%, and higher than the prior month’s reading of 0.5%. Although not necessarily a reading that will translate to higher consumer prices, it does show upward pressure on prices on the wholesale level, which may eventually trickle down to consumers. In spite of this higher reporting, mortgage bonds are still performing well this morning.
With both mortgage bonds and the 10 Year Treasury Note performing well this morning, we will continue with our floating bias. I’m very encouraged to see the 10 Year break below the critical floor of support. If they can stay below this level, there is more room for yields to fall, which will help pressure mortgage rates lower. As always, if you choose to float, watch the markets closely, as sentiment can change quickly.