19 Dec Locking bias
Stocks have had their best two day winning streak since 2011 and are again moving higher today. In fact, the S&P 500 is now only 0.5% away from their all-time high and will very likely close that gap today. Christmas week is historically a strong week for the stock market and could add further pressure to mortgage bonds, which have been hanging on loosely to support following Wednesday’s announcement by the Fed. When you look back on the past few Fed announcements however, bonds initially suffer losses and then recover a short time later. Hopefully history will repeat itself again today. The strength of the stock market may be the factor that prevents bonds from improving. With stocks moving higher, bonds will have a difficult time advancing.
Regardless of the markets’ reaction to the Fed announcement and preemptive statement regarding higher interest rates to come, there was no real “new” news brought forth. We all know rates will be higher in the future. The reality is that nothing changed: China is still having issues, Russia is in a financial meltdown, and oil prices are driving consumer prices lower which is putting many energy based companies on the brink of default. The realities of the economics are still in place, with many showing unstoppable strength and others posing serious threats. It seems, however, that the stock market is looking solely at positive and not taking the threats into consideration.
With mortgage bonds under significant pressure, we are going to maintain our locking bias. One important determining factor for the near term direction of mortgage interest rates is the 10 Year Treasury Note. The key trigger will be the yield on the 10 year to stay beneath 2.22%. A break above this will be a very negative sign for mortgage bonds and for interest rates. If next week’s stock market sets new all-time highs, rates could be set up for a challenging week ahead.