Locking bias

Locking bias

ADP released their estimate of new job creations for the month of May this morning. As expected, they reported 173,000 new hires. Since this number nearly matched the 175,000 anticipated, there was little reaction in the bond market following the report. Most investors will wait for the more widely esteemed Bureau of Labor Statistics (BLS) report that will be released tomorrow morning. Although the BLS and ADP reports tend to even out over the long run, they have been known to vary dramatically from one month to the next. However, they have been more similar in the most recent months. For the sake of maintaining low mortgage interest rates, the hope is that the report will not show a significantly higher than expected number. If it does, a bond market sell-off can be expected, which will increase the APR on most mortgage loan options.

 

Mortgage bonds ended the day yesterday beneath their 50 and 25 day moving averages. It is common for the bond market to experience an increased level of volatility ahead of the monthly job report released. Given that tomorrow will be the release of the BLS report, we can expect the volatility to continue today. Although not impossible, it would be unlikely to see any significant gains today. In fact, given that we are now back at the top of the sideways trading range, the likelihood is that mortgage pricing will be worse today and possibly experience a more dramatic sell-off before the end of trading today. Many investors will be taking their investments off the table to avoid the potential losses associated with a strong job report.

 

In light of tomorrow’s report, the safe play will be to have a locking bias going into tomorrow. If the release is strong, we could easily lose 60 basis points in the bond market. Now may not be the time to take risks for those needing to close in the near future.