Continued Locking Bias

Mortgage bonds have lost nearly 100 basis points after Monday’s failed attempt to pierce above the triple layer overhead resistance that has held back bonds since late May.  Bonds are now trading in a wide sideways channel between their 25 and 100 day moving averages on the bottom and the triple layer ceiling of resistance at the top.  Given the space between resistance and support, bonds will likely trade with wide swings between each point until something provides the motivation to cause bonds to either make a break higher or push them lower.  Friday’s Bureau of Labor Statistics (BLS) Jobs Report could provide such catalyst.

We received the first of three reports on the job market today with ADP releasing their estimate of new job creations in the month of July.  Interestingly enough, the report showed that job creations softened last month, with only 185,000 new jobs estimated.  This was well below the 210,000 estimate and could set the stage for a lower expectation for Friday’s BLS report.

Today’s low ADP report caused the stock market to jump higher and bonds to sell off, as investors took the news as possibly causing the Federal Reserve to delay a rate hike.  A rate hike at this point would be negative for the stock market and likely help improve the bond market.  Therefore, any delay in the timing of the hike could cause mortgage rates to bump higher.  We don’t feel like this report alone will cause the Fed to pause and investors will likely come to this conclusion as well.

Given the wide range bonds are now trading in, the safe play continues to be locking.  Friday’s BLS report will set the stage for how bonds will react in the near term.  Watch the markets closely over the next few days.  It could get exciting!