15 Jan Locking Bias
Mortgage bonds are down and stocks are higher so far this morning. Inflation data was released today, showing Core PPI taking a steep jump higher. Inflation is the one aspect of our financial system that has been dormant. One of the primary goals of EQ was to stimulate inflation, which we believe will be higher than most experts are predicting by the end of 2014. Since interest rates are heavily influenced by inflation, as we see inflation continue to heat up we will certainly see interest rates move higher as well.
Mortgage bonds were pushed beneath both their 50 and 100 day moving averages yesterday, and are now floating within a wide trading range. Given the current path of least resistance, it wouldn’t be a shock to see them fall to the next floor of support, which is approximately 25 basis points below current levels. Hopefully most of the damage has been done, but we may see a bit more before things improve. In the short term, we will maintain a locking bias, with the hope of a bounce higher when we hit the floor beneath us.