22 May Locking bias
Turns out that yesterday was the best day of the week to lock in an interest rate. Mortgage bonds broke above their 200 day moving average yesterday
afternoon, improving mortgage interest rate pricing. However, bonds took it on the chin this morning and are once again beneath the 200 DMA.
The battle over this important trend line is one of the most significant battles bonds have fought in years. With each day that passes, it becomes
less likely that bonds will win. A decisive break beneath the 200 DMA would likely mean a long term trend reversal in mortgage interest rates.
We could see a repeat of the crash and burn we had back in May of 2013 when mortgage rates moved up over 1% in just a matter of weeks. This would
devastate our housing market, as it did back then. Further, it would hurt the many people who have yet to refinance to take advantage of lower
Today’s bond market drop was a result of a hotter than expected Consumer Price Index. The Headline CPI number came in at 0.1%, with a year over year
increase of -0.2%. Although this number met the market’s expectation, the Core CPI (which extracts food and energy) came in at +0.3% with a year
over year increase of 1.8%. This sparked the market to sell off, as investors know that the Fed will use this as a reason to support higher short
term interest rates. The headline number is only as low as it is due to the significant drop in energy prices. We all know that as oil
prices move higher we will see inflation move closer to the Fed’s target of 2%.
There is very little change to our view on the market. This is a very risky time to be floating an interest rate. Therefore, we will maintain
our locking bias.