29 Aug Locking bias
Mortgage bonds took a fall on Friday, driving the APR of mortgage interest rates higher in the process. Then today opens strong and bonds recoup their losses. This seems to be a trend as of late. However, the key concern is that in the midst of all the volatility, bonds continually drop below previous low targets. Further, when they regain their losses, they tend to fall just shy of highs they achieved just a couple days earlier. The trend of setting lower low points and lower high points is a negative sign for the mortgage market. Although it makes the overall losses slower, over time there can be dramatic changes.
The Personal Consumption Expenditure (PCE) report for the month of July was released today, showing inflation remained at an anemic level. On a month-over-month basis, inflation was flat. On a year-over-year basis, PCE is +0.8%. When stripping out food and energy prices, Core PCE is +1.6%. This was welcomed news to the bond market, as inflation is the arch enemy of mortgage bond holders. The higher the rate of inflation, the greater return they will demand on their investments to maintain the same level of what is referred to as a “Real Rate of Return.” As time goes on, we anticipate inflation to move slightly higher in coming months. That could help pressure mortgage interest rates higher.
Mortgage bonds are once again above their 50 and 25 day moving averages. However, as we have learned in recent weeks, this can change quickly. Therefore, we will maintain our locking bias.