21 Mar Locking bias
Mortgage bonds hit up against their 25 day moving average on Friday and were pushed back lower at the opening this morning. They have since broken beneath the floor provided by their 50 DMA and are now sitting on the next floor of support. This weakness appears to be driven by profit taken by investors who became weary as bonds hit the 25 DMA. Lacking the strength to make a break higher, bonds are now trading in a sideways channel between the two levels. It seems that the near term direction of mortgage interest rates will be heavily influenced by the direction of both stocks and oil prices. If the run up in oil prices loses steam, as we believe is likely, we could see mortgage rates receive some additional support.
Following last week’s gain of 2.3%, the US stock market is now in positive territory for 2016. In just over a month, stocks have climbed approximately 14% from their lows. After this strong of a run, it is common to see a bit of a pullback. However, with stocks now above their 200 day moving average, they have very strong support beneath them. This increases the risks associated with floating an interest rate. If stocks continue to climb, it will likely pull investor money out of the safe haven of bonds and into the riskier stock market. There are clearly a lot of factors that will determine where rates head playing out in the markets right now. If you’re not comfortable gambling, this is not a time to take risks.
Given the risks associated with the current state of the markets, we will maintain our locking bias.