16 May Floating bias
Mortgage bonds continue to move higher this morning, once again breaking above their 25-day moving average. With another slow economic reporting news day, investors seemed to be watching to see where stocks go from here after the S&P 500 tested a new record high in early morning trading. Given the current news headlines continually rocking the political world from day to day, it’s a bit of a surprise to see stocks performing as well as they have been. Usually, this type of chatter would create uncertainty within the markets and cause stocks to retreat in reaction to the political volatility. We will have to see if this eventually catches up and causes stocks to pull back.
Stocks are still inflated following President Trump’s proposed tax reform plan announcement a couple of weeks ago. Although this will be a tough sell to many in the Senate and Congress, investors are still hopeful. Given the battle ahead, we feel it’s unlikely that this will pass in 2017. With the next mid-term election in 2018, there is a strong chance that Republicans will lose some of their seats as our country looks to add more balance to the equation. Therefore, they have limited time to make their case. If this plan does eventually pass, it will essentially eliminate the benefit of having a mortgage to an estimated 25 million Americans due to the increase in the standard deduction rates. On the flip side, it will be of great help to those who currently rent.
With stocks facing a tough ceiling of resistance, mortgage bonds could continue to benefit. We will suggest floating if bonds do not retreat below their 25 DMA. Should that happen, the safe play will be to lock.