Cautionary Floating Stance

Mortgage bonds started the day stronger after mostly bond friendly news was released this morning.  New housing starts came in at 880,000, which is much lower than the 950,000 annualized rate expected.  Also, new building permits were modestly lower as well.  The continued declining trend in the housing market is somewhat influenced by the unusually harsh winter much of the country is experiencing.  However, we feel this has been an over exaggerated excuse, as markets such as Utah, which have had a very mild winter, are also trending lower in home purchase transactions.  The spring purchase rush will be closely watched to see if the trend will perpetuate further, even after the weather improves.  We feel it is just one more example that our economy is not prepared for higher interest rates, as many ‘would have been’ home buyers site higher rates as the reason for not moving forward.

Producer Price Index (PPI), which measures inflation on a wholesale level, was reported at an annualized rate of 1.2%.  Although still mild, this is higher than last month’s reading of 1.1%.  Remember, this measures inflation on a wholesale level, which doesn’t always translate to higher prices on a retail level.  We will have to watch closely to see if consumer prices move higher.  When this happens, mortgage rates will certain follow the increasing trend.

The Fed FOMC meeting minutes will be released today.  In the past, this has been a negative event for the bond market.  Watch the market’s reaction closely, as news may be released that spooks the markets.

Mortgage bonds pushed above the triple layer of resistance yesterday, and now have significant support below.  The 10 year note yield also broke below support, which is also interest rate friendly.  We have to be careful with bonds looking to possibly be staging a fall.  Although too early to predict, the charts show that we may be at the top end of a downward cycle.  If we start to follow this path lower, we will be in a solid locking stance.  Until that plays out, we see little benefit to float, but not a lot of reason to immediately lock.