01 Feb Locking bias
Despite a significant downturn in the stock market the past couple of days, mortgage bonds have failed to make any reasonable gains. The 50-day moving average has proven so far to be insurmountable. For bonds to make a break above this level, we will likely need to see a more dramatic fall in the US stock market, or more significant news that causes investors to lose faith in the strength of the US economy. However, based on recent data, that isn’t likely at the moment.
Today is Fed day. Although we don’t expect a rate hike at this time, we are concerned about the language and other policy changes the Fed may make. For instance, they have been reinvesting the proceeds of mortgage bonds as their portfolio of holds are paid back. This has amounted to billions of dollars of new purchases of mortgage bonds each month. It has been talked about that they will eventually stop reinvesting back into mortgage bonds to shrink their portfolio. When they stop, mortgage interest rates will certainly drift higher as a result. Many fear the announcement will be made in today’s update. Therefore, we will be listening closely.
News of the day showed continued economic strength, highlighted by ADP’s estimate of new job creations in the month of January. They reported 246,000 new hires, which is the second highest number reported in the past 13 months. On Friday, we will receive the Bureau of Labor Statistics’ report, which is considered to be the more significant of the two reports. Given ADP’s strong number, we can now anticipate a strong report from the BLS as well.
Given the continued weakness in the bond market, we will maintain our locking bias.