20 Sep Locking bias
Markets have been relatively flat this morning, as investors wait for the outcome of the Fed meeting that concludes today at 12:00 pm mountain time. Following recent news of much higher than anticipated import and export prices, the odds of a rate hike when from very little to a hike being on the table. We feel a rate hike would have a damaging impact at this point, so we still feel the Fed will pass on a hike. We also believe the Fed will announce the beginning of Quantitative Tightening. Overall, with the Fed not hiking, and QT being announced, this could be a negative event for the near-term direction of mortgage bonds.
Bonds have been riding along the bottom of a sideways trend line. They have also hit the far side of a downward trading channel. The good news is that if markets respond positively to the Fed announcement, we could see bonds break out of the downward trend in which they have been trapped for the past couple of weeks. However, if markets react negatively to the Fed statement, we will see the downward channel intact, which will mean interest rates will likely take a step higher. We will have a much clearer picture on the near-term direction of mortgage interest rates tomorrow.
Given the continued weakness, and the potential negative reaction to the Fed announcement, the safe play will be to maintain a locking bias.