29 Jul Locking Bias
Today is Fed Day and the rate policy announcement just rolled off the wires. As expected, there was no change to short term interest rates. Also, there was no real hint in the message about the timing of the first rate hike. Overall, the announcement was a non-event. They mentioned that they would hike rates when they saw further improvement in the labor market and when they are confident that inflation will move towards their 2% target. They did, however, upgrade their outlook on the labor market, stating that there have been “solid” gains. Although the job growth wasn’t bond friendly news, mortgage bonds improved slightly immediately after the announcement.
In housing news, Pending Home Sales were reported to be -1.8% in the month of June. This was below the market’s expectations of +1.0%. However, it should be noted that last month’s number was the best reported in 9 years. Therefore, the bar was set very high from the onset. Since this number measures signed contracts on existing homes, it implies that near future closings on existing homes will be a bit lower than what we are experiencing right now. This slowdown is partially a result of a lack of inventory on the market. If more homes were available on the market, we are confident we would see this number move higher.
Mortgage bonds are now off the upward channel that has driven rates lower the past few weeks and now appear to be in a sideways pattern. Given their inability to break above current overhead resistance, we will maintain our locking bias.