Locking bias

Mortgage bonds dropped from the tip top of their trading channel yesterday morning all the way down to the very bottom.  The main culprit for the swift change was the Federal Reserve interest rate decision that was released at noon MST.  Within the Fed’s Monetary Policy Statement, the Fed funds rate maintained its 0% – .25% range.  However, the market was surprised when it directly referenced the December meeting as a time in which a rate hike could come into play.  In reaction, the Fed’s Futures contract showed an increase in the implied probability for a hike at the December 16^th FOMC meeting to 43% from the 34% prior to the statement.  Regardless, keep in mind that this number has changed many times in recent months and remains subject to economic data as it becomes available.

The floor of support that timidly held bonds up yesterday then broke loose this morning, causing mortgage bonds to quickly tumble down to the next floor provided by the 50 day moving average.  That only held for a short time before bonds were sent tumbling lower once more.  They now appear destined to fall down to their 100 DMA, which is currently about 35 basis points beneath current levels.  This is a very negative sign for the near term direction of mortgage interest rates and brings conclusion to the story of which direction bonds would break out of their nearly 5 week channel.  Although not what we had hoped for, there remains strong support beneath us once more.

The advance reading on 3^rd quarter GDP was reported this morning to be 1.5%.  Although below the 1.7% anticipated, the news provided little support to help keep bonds from falling.  It seems that fear of a Fed rate hike in December seems to be the primary driver of the markets.  Since we have not faced an increasing interest rate environment since June of 2006, investors are unsure how to position their holdings as we head into this environment once again.

Given the overall weakness in the bond market, we will maintain our locking bias.