16 Mar Great risk in floating
A look at the bond charts show a strong upward channel that formed in late December and carried mortgage rates down to their low point of 2 years. This was followed by a mirroring downward channel that formed in the later part of February and is still in place today. The strength of the channel was strong enough to push bonds beneath their 50% Fibonacci line yesterday, meaning that we have now given up 50% of the gains we received from the upward channel of earlier this year. Bonds are now falling towards their next floor of support, which is provided by their 100 day moving average. With the Federal Reserve interest rate and policy announcement expected soon, we could see further deterioration in the market as the day moves on.
Some of today’s losses in the bond market can be attributed to this morning’s release of February’s Consumer Price Index (CPI) report showing stronger than anticipated inflation. When stripping out food and energy, the report showed an increase of 0.3% for the month. This was higher than the 0.2% anticipated. In addition, the year over year number jumped from 2.2% up to 2.3%. This was the highest level we have seen in 8 years. With this now well above the Fed’s target rate of 2%, they are in a tough position. Although there is virtually zero chance they will raise rates today, they may set the stage for a June rate hike. That could rock the stock and bond markets, so be on guard for further volatility.
With the downward channel in full force, there is great risk in floating. We will maintain our locking bias.