14 Jun Great risk in floating
Mortgage bonds continue to battle the overhead resistance level that has held interest rates from falling below current levels for the past three years. Eventually, bonds will either grow tired of the fight and fall lower or they will make a decisive move higher. At this point, it’s too early to say which direction things will go. However, it would be unlikely to see any significant gains made ahead of tomorrow’s Federal Reserve interest rate and policy announcement. Although there is very little chance of a Fed rate hike, the market could be pushed in either direction based upon the comments made at the time of the press release.
Overseas, the German Bund has turned negative for the first time in history. In essence, they are charging their investors’ for the privilege of keeping their money safe. This is mainly in response to fears of Great Britain exiting from the European Union. The “Brexit”, as it is called, will be up for vote on June 23rd. If the current polls are correct, it appears likely that it will happen. This would clearly shake up the financial markets and would likely create a ‘flight to safety’ where investors move their money into the safe haven of US bonds and the 10 Year Treasury Note. This would help improve mortgage rates and drive the yield of our 10 note lower.
There remain great risks in floating. With mortgage rates near three year lows, we will maintain our locking bias until we see a clearer path forward.