Locking bias

Locking bias

Stocks are near flat at mid-day today, with mortgage bonds slightly higher. With the “Brexit” vote count down winding down, it won’t be long before the world knows whether Great Britain will remain a part of the European Union. Although polls are neck and neck, experts are placing the chance of a Brexit in the 30% range. Since a Brexit would add additional uncertainty to global markets, global stock markets are hoping for things in Great Britain to continue as they now are. We will find out late tomorrow the results of the vote, with an announcement expected sometime around 6:30 pm MST. Since markets will be closed at the time of the announcement, we could see additional volatility ahead of its release.

 

In Janet Yellen’s testimony to the Senate yesterday, there was very little spoken that surprised the markets. It seems like Janet is highly in tune with the overall global outlook and seems to be one who truly gets what is going on. The challenge she is now facing is regarding a growing pressure to raise interest rates. However, she is keenly aware of where we are in the current economic cycle and realizes that the time to raise rates may have passed. If they said no to rate hikes when job growth was exceeding 250,000 per month, it would be difficult to justify hiking rates when growth is less than half of what it was. At this point, the true chances of multiple rate hikes happening in 2016 are waning. Even more conservative members of the Fed are now projecting only one rate hike before 2018. That’s a massive shift from the predictions of early 2016 when the estimate was for 4 rate hikes in 2016 alone. It will be interesting to see how things play out in the months to come.

 

We currently have a very strong floor of support, not too far beneath current levels. However, a vote out of Great Britain to stay within the European Union could cause bonds to make a break lower. Therefore, the safe play will be to maintain a locking bias as we wait to see the market’s reaction to the vote.