27 Jul Lock to Protect Gains
Mortgage bonds received a boost that was ignited by weakness in China’s Shanghai Stock Market, which fell by 8.5% on talks that China may stop supporting their Stocks. Since the major sell off that occurred in China’s stock markets a couple weeks ago, China has been making investments to boost their stock market in hopes of preventing further losses. The strategy worked well and achieved its desired results. However, fear of the Chinese government no longer backstop now has the markets fearful and unsure of its ability to stand on its own without government backing. This fear has carried over to the US stock markets, and has helped boost mortgage bonds above the ceiling that has held rates from improving for a number of weeks. This is a good sign for mortgage rates. If bonds are able to continue to build on this momentum, we could see rates pressured lower in the near future.
It is a quiet news day today. However, it will be an action packed week that is highlighted by Housing Data, a reading on GDP and a Federal Reserve Meeting. You can be certain that the markets will be closely listening to each word from the Fed, as they look for direction on the future of short term interest rates. It was fear of a Fed rate hike that sparked mortgage rates higher in early May. However, it is the execution of the rate hike that could actually help mortgage rates move lower in the near future. A rate hike would provide protection against upward pressure on inflation. Since inflation is the arch enemy of a mortgage bond (or any bond for that matter); a rate hike could be exactly what is needed to prevent a further increase to mortgage interest rates.
Mortgage bonds are now trading in a wide range. Although they are still on a short term upward trend, which helps support lower mortgage rates, the risk of volatility remains high. The safe play will be to lock to protect the gains we have had the past few days. However, if you choose to float, watch the markets closely. Although bonds are doing well at the moment, sentiment can change quickly.