27 Mar Great risk in floating
Mortgage bonds suffered heavy losses yesterday, but were able to find support and bounce higher to begin the trading day today. From a longer term perspective, mortgage bonds are now riding the bottom of a two year channel that has driven rates lower. As long as bonds stay within this channel, rates will improve long term. However, when riding the bottom of a channel there is always risk of a breakout to the downside. Should this happen, we will certainly see rates move higher. Since breakouts are rare and nearly impossible to predict when they happen, it may take significant news to make that happen. In the meantime, we will ride shorter term channels up, sideways and down as we maintain the longer term channel.
GDP for the 4th quarter of 2014 was reported this morning to be at 2.2%. Although not terrible, it was beneath the 2.4% anticipated and well below what we need to sustain in order to see long term improvement to wages, the job market and overall economic stability. In reality, we need to see GDP in the 4% + range for this to happen. We are a long shot from that level. Considering that the 4th quarter often brings in strong numbers, it can be reasonably assumed that we will see an even lower number for the 1st quarter of 2015. The cold winter months of January – March often slow economic growth. We will have to see what the preliminary number is when it is released in April.
With volatility in the bond market continuing, there is great risk in floating. Rates are great today, making now a wonderful day to lock.