GDP Exceptionally Strong, but for the Wrong Reasons

After mortgage bond prices broke out of a downward trend, prices have broken above their 25-day moving average. The key concern at this point is whether they will maintain the strength to stay above this critical level. The move puts bonds in a nice technical position that could lead to mortgage rates moving back down to the lows we saw back at the end of March before rates started to tick higher.  At the moment, this is great news for mortgage interest rates, which improve as bond prices strengthen. If prices can close the day today at current levels, we could see some follow through next week. So, let’s cross our fingers and hope that bond prices don’t lose steam as the day wears on.

Today’s GDP report showed that the U.S. economy grew at a 3.2% pace in the first quarter of 2019. Although this is an exceptionally strong report, a deeper look shows that it was largely due to government spending and a huge stockpile of corporate inventories that were solely to protect against massive tariffs that were coming. Neither of these are the types of reasons we like to see as rationale for strong GDP growth. In fact, the consumer sales component of the report came in at a 6-year low.  This is not a good sign for the strength of the economy. Overall, bond investors are seeing right through the headline report which is why bond prices are rising vs falling.

Now that bond prices are above both the downward trend line as well as their 25-day moving average, there is no need to rush to lock. However, it’s uncertain whether prices will be able to maintain. So, if you float, do so only if you can closely watch the markets.