25 Aug Locking Bias
Markets are performing well following Fed President Janet Yellen’s comments on Monetary Policy at her Jackson Hole speech. Moreover, it was the lack of what she said that has the markets excited. Rather than come out and spend her time telling the attendees that inflation will soon hit their 2% target and that interest rates will continue to climb higher, she spent most of her time defending Financial Reform. As a result, investors took that as reason to celebrate. Both stocks and bonds are currently moving higher, as both markets would like to see economic stimulus measures continue.
Mortgage bonds are once again testing the top of the range. As bonds have bounced from the top to the bottom of the current range, they have been strengthening by not falling below the bottom of the channel. I believe that eventually, which is hopefully within the next couple of weeks, we will see bonds make a break to the upside of this channel and move towards pre-election levels. It seems that the “Trump” factor has mostly died off, which means interest rates could move back down to where they were prior to November. Although that is completely contradictory to what most experts believe will happen, it seems more and more likely each day.
Until bonds are a able to make a break above the current channel, the safe play will be to continue locking. Hopefully soon we will see a break and can then suggest a floating bias as rates improve. However, it’s too early to make that prediction at this point.