21 Oct Locking Bias
After suffering losses yesterday, mortgage bonds rose to the top of their trading range today. There has been very little news to drive the markets, so the move higher is mainly attributed to being technical. The stock market seems to have hit a ceiling and has been unable to break above its 100 day moving average. If weakness in stocks continues, we can expect to see bonds at least hold their ground and maintain the sideways channel they have been trapped in for weeks. Since bonds have already tested the top of their channel today, it is clear they are looking for a reason to bounce higher. It would be a nice move for interest rates to see this happen. At some point, they need to decide if they will head higher or lower. They won’t likely remain trapped in this channel for too much longer.
After a brief rise in the price of oil, prices continue to fall back within the low range they have grown accustomed to. Overall, commodity prices have struggled lately. Low inflation and a strong US dollar have contributed to challenges for commodity investors as well as employees in oil and other commodity based businesses. Since this adds downward pressure to interest rates, home buyers have benefited from the drop in prices. Low oil prices and a strong US dollar also make it difficult for the Fed to raise interest rates. A rise in rates could add additional downward pressure to oil as well as upward strength to the dollar. This puts the Fed in a difficult situation as they prepare for yet another Fed meeting and interest rate decision next Wednesday.
With bonds still trading in the sideways channel, we will maintain our locking bias.