Bonds Forced to Decide a Direction Soon

Stocks are climbing higher today, while mortgage bonds continue to get squeezed between their 25 and 50 day moving averages.  I anticipate we will see a break out of the tight trading range either today or early on Monday.  As mentioned yesterday, we see a strong likelihood that the break will be to the downside, which isn’t good news for mortgage interest rates.  Also keep in mind that because there are two channels that happen to collide at the same time, the breakout in either direction will likely be exaggerated.  This means we will likely see a stronger move down once the channel is broken.  This makes now an opportune time to secure a rate.

Next week we will get an updated reading on the Fed’s favorite gauge of inflation, the Personal Consumption Expenditures report.  If we see consumer inflation numbers tick higher, we can expect to see mortgage interest rates move higher in response.  Inflation is the arch enemy of mortgage bonds.  As inflation ticks higher, it erodes the returns made to investors.  So to make up the losses, they demand higher interest rates to maintain the same real rate of return.

With bonds nearing a potential negative breakout, we will maintain a locking bias.