Locking bias

Locking bias

Even after the technical impact of a bond coupon roll-over, mortgage bonds remain above their 100-day moving average but capped by the strong ceiling of resistance that has held mortgage interest rates from improving beyond levels last seen in November of last year.  Overall, this is a strong statement for mortgage bonds to make.  However, there is still a lack of expectation of pricing getting better in the near term.  It will likely take a dramatic economic, political or global event to provide bonds with the hope of making a decisive move above this ceiling. 

 

In a speech yesterday by Fed President Janet Yellen, she confirmed the current path of tightening already planned by the Fed.  This calls for two additional rate hikes in 2017, followed by the Fed reducing their balance sheet as a form of tightening rather than continuing with rate hikes.  The reduction in the Fed’s balance sheet will more specifically increase market interest rates, such as those tied to mortgage lending.  By reducing their holdings of mortgage backed securities, they will shift the supply / demand scale in a way that will require interest rates for home loans to move increase.  That will be a slow process that could take years to unwind. 

 

Unless bonds can make a break above the current ceiling of resistance, we will maintain our locking bias.