20 May Locking bias
We’ve had an extremely volatile week in the stock and bond markets. This was greatly influenced by the Federal Reserve and the statements made in their April meeting. Investors are now fearful of a rate hike when the next rate announcement happens in June. Given the lack of new jobs created in the month of April, combined with continued low inflation number, we feel that the chances of a rate hike actually happening are slim. It would take a very strong jobs report when May’s employment gains are announced on the 3rd of June for the Fed to have any reasonable likelihood of increasing rates at this time. The data at this point just doesn’t support that.
Mortgage bonds remain trapped in a steep downward channel. They have tested support of the 100 day moving average which is right now in the middle of the downward path. A break beneath this level would likely cause bonds to move to the bottom of the downward channel. The longer they hang out at this level, the greater the downward pressure to move lower. Hopefully, bonds will be able to maintain their sideways movement and eventually break out of the downward channel. However, until that happens, bonds are subject to great risk in the short term.
Since bonds remain trapped in a downward trading channel, we will maintain our locking bias.