Locking bias

Mortgage bonds gained back all their early morning losses yesterday after Mexican President, Enrique Peña Nieto, canceled his scheduled meeting with President Donald Trump. In a well-prepared statement, President Nieto reiterated his prior statements that Mexico will not pay for any wall. He further implied that although Mexico aims to have a friendship with the US, it will demand respect and will accept only policies that are beneficial to the Mexican people. As polls confirm, the Mexican people see a wall as decisive. Therefore, President Nieto’s decision to cancel the meeting aligns with the views of the people he was hired to represent. Since most expect a strong response to this decision from President Trumps’ team, bond markets improved on the news.

Yesterday afternoon’s positive momentum continued in the bond market this morning after 4th Quarter GDP showed a poor performance.  The initial report shows that the economy grew at a pace of 1.9% in the 4th quarter of 2016. This was below the markets’ anticipated rate of 2.2%, and brings the true rate of growth for the year 2016 to 1.6% overall. This is a big drop from 2015’s rate of 2.6% and makes 2016 the weakest number in 5 years. Further, Durable Goods Orders came in at -0.4%, which was well off the +2.6% gain expected. However, a deeper look shows that almost all of this was due to slowing aircraft orders. Regardless, today’s news was soft and has helped improve mortgage bonds.

Although higher, mortgage bonds have a duel layer ceiling just above current levels. Therefore, we will maintain our locking bias.