Locking bias

In textbook bond trading fashion, mortgage bonds fell sharply since hitting the 50% Fibonacci level a few days ago.  As discussed in many recent market updates, after a dramatic fall in bond prices, we can expect to recover 50% of such losses before bonds make another fall lower.  With this motion now in progress, bond prices could drop below prior levels, which would set new multi-year high mortgage interest rates in the near term.  If this does in fact play out, it will likely only take a few days before such highs are tested.  As we have seen in the past, bonds improve slowly and deteriorate quickly. 

Yesterday’s speech from Fed President Janet Yellen did little to help support low mortgage interest rates in the near term.  She mentioned a Fed Funds rate of 3% in 2019, which caused mortgage bond holders to sell holdings to avoid continued losses to their portfolios that will happen as interest rates rise.  History shows us that the Federal Reserve has a not so great track record of gauging the timing of a market change.  Generally, when the economy is improving, they tend to be late in their move to raise interest rates.  Given the recent signs of inflation and economic expansion, combined with anticipated policies of President-Elect Trump, it is likely they will need to raise more quickly than anticipated.  We will have to wait and see.

With bond prices falling, we will maintain our locking bias.