Gains of floating would be minimal

There are once again no meaningful economic reports scheduled for today, so bonds will trade based upon the technical picture.  With a little help from a mortgage bond coupon rollover, bonds dropped to the bottom of their trading channel as projected in yesterday’s market update.  In fact, they actually dropped a bit below the trading range.  However, any time there is a bond rollover, the charts will be skewed for a bit.  It generally takes a day or two for bonds to get back to where they should be.  Therefore, we must take some of the downward move from yesterday with a grain of salt.  Without the rollover impact, we would be sitting just above the bottom of the trend line.

The reality of a pending economic recession is beginning to penetrate into the minds of investors.  Bloomberg released an article today that highlights the fact that our 83-month-old expansion is already the fourth-longest in the past 150 years and is now showing signs of aging.  Since the downturn that ended in June 2009, the US stock market has experienced stronger than ever growth and the labor market has grown at a pace not seen in many decades.  With corporate profits peaking and wage pressures building, the risk of a downturn is high.  History shows that current market conditions, combined with an exuberant level of optimism are most often precursors to a recession.  This would help hold mortgage rates lower for years to come. 

Now that bonds are at the bottom of a trading channel, there is no need to rush in and lock.  However, we are near all-time high levels in bond pricing, so the potential gains of floating may be minimal.  If you choose to float, do so carefully and only if you are able to watch the markets closely.