Locking bias

The lack of enthusiasm in the bond market continues this morning, as mortgage bonds continue fighting against a seemingly unstoppable stock market.  However, we can anticipate a tough battle for the stock market as it approaches all-time high levels.  The timing of this point comes within weeks of a highly anticipated Federal Reserve meeting where many believe there is a 60-70% chance that short term interest rates will be moved higher, which will be the first time this has happened since June 2006.  Increasing borrowing costs would be bad for corporations and will create additional headwinds for profits.  Further, increasing yields in short term notes will offer investors more options to make money other than the higher risk stock market.

Today is a quiet news day, so the technical picture will heavily influence the direction of mortgage bonds.  Tomorrow we will receive the first read on 3^rd quarter GDP.  Since this is one of the most significant drivers to the direction of mortgage rates, it could be a market mover.  Further, we will also receive the Case Shiller Home Price Index tomorrow which could shed some light on the current state of the housing market.  Given recent strong reports on the housing market, we anticipate this to be a strong report.  On Wednesday we will receive a heaping serving of data, including Durable Goods, Unemployment Claims, Personal Consumption Expenditures (PCE), FHFA House Price Index and New Home Sales.  Therefore, we could be in for a wild day on Wednesday!

In light of continued weakness in the bond market, we will maintain our locking bias.  We remain above a critical level of support.  If support fails to hold, we can anticipate a move higher in mortgage interest rates.