21 Jan Locking bias
Mario Draghi, the president of the European Central Bank (ECB), said that the ECB may ease their policy further at the March Meeting due to weak inflation and low oil prices. He said that there is no limit to how far the ECB will go in using their tools. This is a clear signal that more stimulus may be in the works to help boost the European economy and stock markets. This is certainly something the Fed will be watching closely. It seems that until they back off their statements where they are estimating 4 Fed rate hikes in 2016, the stock market will continue to show extreme volatility with further risk to the downside. Since there is very little chance of our economy being able to handle 4 rate hikes, we feel the reality is that we will have one or two at the most in 2016.
Mortgage bonds have continued to show resilience. However, the stock market is now at a point where a partial rebound is likely. This would push mortgage bond pricing lower, creating upward pressure on mortgage interest rates. Further, the 10 Year Treasury Yield hit a floor that will likely require a more significant drop in the stock market to break beneath. Therefore, interest rates may now be as low as we will see them in the short term. Watch the stock market closely. If stocks fail to rally today, mortgage bonds and the 10 YTN will likely be the beneficiaries.
With the stock market likely to move higher today, we will maintain our locking bias.