16 Jun Locking Bias
Mortgage bonds remain near multi-year highs, meaning interest rates remain near multi year lows. At this point, it is important to again mention that each time in the past few years that bonds have reached these lofty levels, they were pushed down shortly after. We are near unchartered waters in the market, so assuming rates will improve any further is a risky assessment. The charts show that bonds are in heavily over-bought territory, which typically is a pre-cursor to a bond sell-off. Although anything can happen, this may not be the time to gamble with a rate lock. The odds now favor a period of weakening, at least in the short term.
Yesterday’s Federal Reserve interest rate decision was to keep the Fed Funds rate at current levels. Although there was little surprise in the current decision, we did get important clues on future rate hikes in the speech following the announcement. The Fed Dots, which show the prediction of where the Fed Funds rate will be over the next few years, lowered the expectations down to just one hike in 2016. This is a significant change from predictions from early 2016 of 4 rate hikes, which shows the Fed members are becoming more in touch with the realities of current global economic data. This was enthusiastically accepted by investors, with mortgage bonds improving in the news.
The risk of floating an interest rate remains high. Therefore, we will maintain our locking bias.