Be careful in floating

Low oil prices are helping mortgage bonds to rally this morning.  Last week’s report showing that oil inventories are significantly higher than originally thought is the culprit for the price drop.  Last week, oil prices broke beneath $50 per barrel and are now challenging the critical $48 per barrel level.  If this point crosses it will further drive down prices at the gas pump as well as put downward pressure on the stock market.  Both of which are bond friendly and could help drive down interest rates, which have struggled the past three weeks.  If rates are to improve, mortgage bonds must first challenge a couple key overhead resistance levels.  If bonds are able to muster the strength to break higher, we will hopefully see rates head back to the lows we had a few short weeks ago.

This week brings several high impact financial news reports, as well as reports on the condition of the housing market.  Existing Home Sales were reported this morning for closed sales in the month of January.  Unfortunately, sales were down 4.9% at 4.82 million.  Although sales were reported lower, this was partially due to inventory levels falling.  There is a reported year over year decline in the supply of existing homes on the market of -0.5%.  Low supply did help push the Median Home Price up to $199,600, which represents a year over year increase of 6.2%.  One way to consider this is to recognize that the average home increased $12,500 last year.  If a client purchased a home one year ago and made a 10% down payment, they effectively make a 66% return on their investment.  Not too shabby….

Although there is risk in floating, we are going to have a cautiously floating bias today to see if bonds can continue their run higher.  With the amount of economic news being reported this week, watch the markets closely.  A stronger than expected GDP, inflation or housing report could cause bonds to break down quickly.  We have experienced high volatility the past few weeks.  Be careful if floating.

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