If you choose to float, do so carefully

Mortgage bonds came back from the extended weekend with a show of strength, climbing their way back to their 50-day moving average.  The battle over the 50 DMA is an important one and could set the near-term direction of mortgage interest rates.  We haven’t been above the 50 DMA since early October, when bonds started to show early signs of breaking down.  If they can muster the strength to break above, they will likely climb to the 50% Fibonacci level.  Since that represents the point at which bonds have recovered half of their losses, it will be a tough competitor in the battle for continued improving interest rates.  Therefore, we must be cautious in the near term.

Tomorrow we will receive the Consumer Price Index (CPI) report, which will provide a glance at the current state of inflation in the US.  Given the strength of the US dollar slowing the demand for exports, it seems likely we will see only a modest rise in the rate of increase on consumer goods and services in the near term.  However, we could also see the early exuberance tied to incoming President-Elect Donald Trump’s win provide retailers the confidence to raise prices.  If inflation does show an increase greater than expectations, mortgage interest rates could suffer. 

Although there is little reason to rush in and lock, we must consider the state of volatility in which bonds currently exist.  If you choose to float, do so carefully.  Tomorrow could bring news that will cause rates to open the day with worse pricing.