20 May It could be costly to float
Mortgage bonds are currently trading in the middle of a very wide downward channel. This painful channel brings great volatility, with some days
starting out strong and ending with significant losses, as we saw yesterday. As long as we are riding this channel, the overall theme will be
locking. However, there will be moments when we are at the bottom of the channel when we will likely suggest floating to give the market an opportunity
to make a run towards the top. This will provide days that are a bit better than others. However, floating will come with great risk.
Given the volatility in the market lately, with rates changing multiple times a day in some cases, a choice to float could cost you.
Today is the day the Federal Reserve will release their meeting minutes from the April 29th meeting. This comes out at 12:00 pm MST.
We have several key concerns that could have been discussed in the meeting. One key concern is that the Fed will end their reinvestments of mortgage
loans they have in their portfolio that are paid off. With the current level of refinances happening, there are a lot of mortgages held by the
Fed that are being paid off each month. They are currently taking the proceeds and reinvesting those into the market. If they stop reinvesting,
there will be far fewer buyers in the mortgage backed securities market. This would drive mortgage rates higher.
Bonds remain beneath their 200 day moving average. This is very concerning to be beneath for an extended period of time. If bonds have made
a decisive break beneath the 200 DMA, rates will be on a long term move higher. The last time this happened was in May of 2013. Rates moved
1% higher within about 8 weeks. Hopefully that isn’t in the cards for us now. However, it is appearing that we are in the beginning stages
of this move. We suggest locking. However, watch closely to see how the market reacts after the minutes are released. Hopefully we
will push above the 200 DMA and all will be well once again.