Locking bias

Locking bias

Adding to evidence of economic strength, Unemployment Claims for last week came in at the second lowest level seen since 1973. This comes one day ahead of the ever important Bureau of Labor Statistics Jobs report.  The market is expecting a decent number of jobs and is increasing the chances that we will see a Federal Reserve rate hike before the end of 2016.  As a result, traders are driving down the price of US treasuries which is adding upward pressure to mortgage interest rates.  With the 100 day moving average just below current levels, we are hopeful that this level will hold, at least through tomorrow’s Job’s Report.

 

Since job growth numbers are a critical component that drives mortgage interest rates, the results of Friday’s report will certainly have an impact on mortgage rates.  In considering the risk / reward balance of floating an interest rate into the release, we must consider the data available ahead of the release.  The ADP report showed a weaker than anticipated level of job growth.  Further, 151k of the total 154k new jobs created were in the service sector.  That is largely made up of entertainment and food restaurants.  These are typically lower paying jobs that aren’t necessarily strong drivers of the US economy.  With that being said though, the markets will respond favorably to a strong report.  We also know that Unemployment Claims are now near multi-decade lows.  That further supports a decent report. 

 

With current predictions at 62% favoring a Fed rate hike in 2016, markets will be looking for any reason to reduce exposure.  Therefore, we will suggest a locking bias heading into the report.  Admittedly, we could see bonds rally following the release.  However, we feel this is a safe and prudent strategy.