16 May Locking bias
Mortgage bonds remain trading in a sideways channel, capped with a ceiling that has been in place for roughly three years and a floor of support currently provided by the 25 day moving average. There is strong upward pressure in the stock market today, as rising oil prices continue to help boost stocks higher. The jump in oil took many investors off guard, as prices rose to a six month high amid speculation that the supply glut has been eased. With prices now exceeding $47 per barrel, many analysts have raised their forecasts to reach $55 per barrel by the end of the year. This is great news for the US stock market, which seems to still have strong ties to oil prices. However, this does add a headwind to low mortgage interest rates which generally perform better during times of low oil and stock prices.
This week’s economic reports will be heavy on housing news, which we anticipate to show continued strength in the real estate market. Tomorrow’s Consumer Price Index (CPI) report will also be closely watched and could impact the near term direction of mortgage interest rates. The market is anticipating the report to show an increase of 0.3% for the month of April. Since this will replace a 0.2% gain from April of 2015, the year over year figure would increase from 2.2% up to a 2.3% gain. When considering that the Fed’s target rate of inflation has been 2%, this should be concerning to bond investors who stand to lose money as inflation moves higher.
Bonds are at risk of breaking beneath support, especially if tomorrow’s CPI report is higher than anticipated. With interest rates near three year lows, the safe play will be to lock. If you choose to float, watch the markets closely and be prepared to make a move should bonds fall beneath their 25 day moving average.