15 Dec Locking bias, but watch the market closely
Friday was a wild day in the financial markets, with the stock market suffering losses and the bond market reaping the benefits. Stocks opened the market this morning with a strong move higher. However, stocks aren’t yet out of the woods. It appears that the move higher this morning may just have been a head fake, with more losses in the cards. We will have to wait and see. However, the fundamentals in the stock market are under significant pressure partially due to the enormous drop in oil prices. If the stock market falls beneath the 50 day moving average, mortgage bonds could be the beneficiary as both stocks and bonds are competing for the same investment dollars.
Speaking of oil prices, there are many long term implications if oil prices remain low for too long. First of all, many investment funds are heavily invested in oil based companies. With oil prices at dangerously low levels, many companies are now at jeopardy. It is said that up to 17% of all leveraged loans outstanding are to oil companies. Some of these companies will inevitably be unable to make good on their debt payments with prices at current levels. Should prices fall even lower, the odds of default on oil backed loans will multiply. It is said that if oil prices happen to fall beneath $40 per barrel, the overall risk to our economy are high. Last week it was reported that oil was sold for just above this price in certain parts of our country. Therefore, we are close to reaching this critical level of mayhem.
Mortgage bonds have not yet been able to break above support that has held rates from improving from levels last seen in May of 2013. If the stock market losses continue, this may happen. However, until that point we must consider the risk of floating. Given the strength of the support, the prudent strategy is to suggest a locking bias. If bonds are able to muster the strength to break above support, we could see mortgage rates drop from current levels. In addition to the stock market, watch the 10 Year Treasury Note. The yield is currently trading in a sideways channel. If yields fall below current levels, it will help support lower mortgage rates as well.