Cautious float

Fed Chairperson Janet Yellen showed the markets yesterday that she truly understands the economy in the first day of her two day testimony.  While the majority of economists and financial institutions have made their bets based on a rate increase in June, Janet Yellen made it clear that the Fed is at least a few meetings away from making the move.  This makes a rate increase in June less likely.  With a clear sign that the Fed is in no rush to raise rates, the markets were looking for hints of other Fed tightening.  Janet did hint that their first step may be to halt reinvestments of proceeds from their mortgage backed securities holdings back into the MBS market.  That would be negative to the mortgage market and would put upward pressure on interest rates.  Therefore, this will be something we will be watching closely.

Stocks are down slightly this morning on the heels of the largest monthly increase the DOW has ever experienced.  Since the beginning of February, the DOW is up over 1000 points.  This is the first time this has happened in history and is greatly responsible for the rapid move higher in mortgage rates in this same time frame.  As the stock market climbed higher, much of the money that was poured into the stock market came out of the bond market.  Since the two investments compete for the same investment dollars, mortgage interest rates tend to move higher when stocks move higher and move lower when the stock market is heading down.

Mortgage bonds are now trading in a sideways channel and are currently near the top of the trading range.  This makes the risk of floating high.  Therefore, we will take a cautiously floating bias to begin the morning to see if bonds are able to make a break higher.  It is likely that bonds will wait until tomorrow’s Consumer Price Index reading on inflation before making any significant improvements.  Also, on Friday we will get a reading on Gross Domestic Product (GDP).  Between CPI and GDP, these are the two most important financial reports that influence the direction of mortgage interest rates.  Therefore, the likelihood of significant movement in one direction or the other by Friday is high.