Locking bias

Oil prices are down more than 4% after the world’s largest producers of oil failed to agree on a production cap during their meeting in Doha.  Had an agreement been reached, it would have tightened up the supply of oil in hopes of pushing oil prices higher.  However, even if they were to come to agreeable terms, most would likely have cheated anyway to help cover their cash flow needs.  Therefore, the hoped for results may not have been fully materialized anyway.  There is an inherent lack of trust between each of the parties.  This has been shown time after time in prior dealings.  Either way, commodity investors aren’t happy with the outcome and are showing their disapproval by driving oil prices lower. 

Treasury prices fell this morning, driving yields higher following statements by Federal Reserve Bank of New York President William Dudley called US economic news “mostly favorable” and cited improvement in the economic outlook for Europe.  He further stated that he believes inflation is on track to return to the Fed’s 2% goal “as the labor market tightens further and the transitory factors that have held inflation down dissipate.”  The overall tone of his speech was optimistic, which has been in sharp contrast to prior statements he has made in recent months.  Since he tends to be a more “dovish” voting member on the Fed, investors will take his stronger comments more seriously than those from members who have had a hawkish tone all along. 

Mortgage bonds remain trapped in the middle of a wide sideways channel, and are therefore subject to potential wide swings.  This increases the risk of floating today.  Therefore, the safe play will be to have a locking bias.