Bond Holders Becoming Cautious

Mortgage bonds are relatively flat in early morning trading.  It seems that bond investors are unwilling to continue to drive prices higher ahead of the major news announcements of the week.  Tomorrow the Federal Reserve will conclude their two day meeting, after which time they are expected to announce that they are not raising rates at this time.  However, the statement could create fear of more rapid hikes in future meetings if the U.S. economy continues to grow at the current pace. That would not be good news for mortgage bonds or the 10 Year Treasury Note, which could drive longer term interest rates even higher.  Investors are paying close attention to the narrowing yield curve between short and long term interest rates, and could prepare to allow longer term interest rates to move higher to prevent the curve from getting much flatter. This could hurt potential home buyers looking to make a move this summer.

On Friday we will receive the highly anticipated Bureau of Labor Statistics’ (BLS) Jobs report which will show the number of new jobs created in the month of April.  Since the month of March came in at only 103,000 new hires, I anticipate April’s report to be a strong one. The current consensus calls for 190,000 new hires. However, that seems to be a low target.  A stronger report would not be well taken by bond investors, so we could see an increased level of volatility ahead of the release.

Investors will also be closely watching for news of stronger than expected wage pressure. Wage growth is expected to come in at a 2.7% annualized rate. Again, a report above this will scare bond holders and could create another round of sell-offs.

With bond investors not likely to make significant bets ahead of Friday’s Jobs Report, we will maintain our locking bias.