22 Dec Locking bias
Mortgage bonds have managed to hang in the fight the past few days. Although slowly, bonds have inched a bit higher this week. Bonds were down nearly 20 basis points but have clawed their way back to near flat for the day as investors digest a Christmas helping of economic data that was released this morning. It will be an encouraging sign if bonds can close in the green today, as that would further cement the formation of a small upward trending channel that happens to be within a much wider and more powerful downward channel. With bonds now near the top of the downward channel, they will soon be forced to decide. Will they hit the top and bounce lower or will the smaller upward channel provide the force needed to break out? The answer will be known soon.
Of today’s heaping of economic news, most was surprisingly bond friendly. However, two of the more important reports were Durable Orders and revisions to GDP, both of which were stronger than expectations.
The third revision to 3rd quarter GDP showed that the economy grew at a pace of 3.5%, which was stronger than the 3.3% anticipated and significantly stronger than the 2.2% originally reported at the 1st look of the 3rd quarter.
If bonds are unable to close higher today, they will likely fall lower in the days to come. If we have hope of making a break outside of this powerful downward channel, bonds need to show strength before the end of the trading day. Since bonds are now at the top of the channel, the risk of floating is elevated. The rule is to lock when at the top. Therefore, we will maintain our locking bias.