Bonds have a rough path ahead

Mortgage bonds broke below an important floor of support in late day trading yesterday and are now officially off the upward channel that helped bring interest rates lower over the past week. Although expected, this creates an ugly pattern on the bond charts. Tomorrow’s Personal Consumption Expenditure (PCE) report is now of greater importance to the near term direction of mortgage interest rates. If the report shows inflation on the consumer side is stronger than the market is anticipating, bonds gave a lot of room to the downside before hitting lows of the last couple weeks. This move would increase mortgage rate pricing, hurting fall homebuyers looking to make a move before the holidays.

Yesterday’s drop in bond prices was largely a result of an announcement out of OPEC that an agreement was made to cap oil production. This would theoretically drive oil prices higher. The bond market does not like higher oil, as that generally leads to higher levels of inflation. With inflation being the arch enemy of the bond market, interest rates pushed higher as a result. However, history shows that such agreements are rarely held true, as most producers end up cheating on their agreements in hopes of taking advantage of the opportunity to make additional profits.

The final reading for 2nd quarter GDP was released this morning, showing the economy grew by 1.4%. This was higher than initial reports of just 1.1% and also higher than the 1.3% anticipated. This was not friendly news to the bond market either, which will add a headwind to trading patterns today.

Bonds have a difficult path ahead of them. As a result, we will maintain our locking bias.