Locking Bias

Locking Bias

Mortgage bonds have lifted higher on news out of Greece that they may have a short term solution to stall a potential financial collapse.  Alternatively, they could be forced out of the Euro.  If the latter occurs, that could open the door to other countries leaving the Euro, which would create other economic challenges throughout Europe.  Much of the move higher we have seen is also a technical move.  It is common for bonds to test both the bottom as well as the top of a trading channel.  We are still within the downward channel that has carried mortgage rates higher the past couple of months.  If bonds can muster the strength to break above the channel, we will be in for a nice improvement.  However, it’s far too early to make that prediction at this point.

There is very little economic news in the US to drive the markets today.  Stocks had a significant rally yesterday, with some indexes reaching all-time highs.  The strength of the stock market continues to be one of the Federal Reserve’s key concerns as they decide when to raise short term interest rates.  A step up in the Fed Funds rate could help slow an over exuberant stock market.  However, since we have not had an increase in short term interest rates in nice years, the market is unsure how it will react.  It could actually be the medicine mortgage rates need to know the Fed is fighting off the potential of higher inflation.

With bonds nearing the top of a trading range, the safe play continues to be locking.  If bonds are able to break above the 50% Fibonacci Retracement Level, we would likely see a bond rally that would bring rates down.  Let’s hope for the best but plan for the worst.