Locking Bias

Locking Bias

The Federal Reserve’s tame outlook on the U.S. Economy as well as near term inflation levels sent the bond market into celebration mode yesterday, which is again continuing this morning. While many experts saw a Fed rate hike as a foregone conclusion, some anticipated that the Fed would lack the courage to make a move. In the end, the Fed states they are waiting to see additional gains in the job market as well as growth in inflation levels before beginning the path of raising short term interest rates. Since it has been approximately nine years since the last time the Fed raised rates, the markets are unsure how to respond to the pending increase.  Given low inflation and wage growth, higher interest rates would add additional headwind to the U.S. Economy. Finally, stock prices are beginning to reflect this reality.

Now that the Fed meeting has passed, technical factors are once again becoming relevant. Bond are nearing their 200 day moving average. We feel it would take a major event to create the momentum needed for bonds to break above this level. Since breakouts are the exception and not the rule, the prudent strategy is to assume the rally will be halted by the 200 day moving average.  Each of the last several times bonds have reached this critical level, they were pushed lower and mortgage rate pricing deteriorated as a result. Although the rally may not stall today, there is only a small amount of potential improvement likely.

Given the current position of bonds, the safe play will be to move back to a locking bias. History has shown that locking in when at the top of a trading channel will be the wise move about 80% of the time.  Locking in the gains of the last couple of days could prove to be the wise decision.