High Volatility: Locking Bias

The lackluster performance in the bond market continues today, with bonds trading just above their opening levels of the morning. Investors are showing very little appetite to purchase mortgage bonds ahead of tomorrow’s Consumer Price Index report showing inflation on the consumer level in the month of July. Since this will be the last report before the Fed’s September meeting, it will be highly scrutinized. With the Core Rate of inflation now at 1.8%, an increase of .2% for the month of July will raise the Core Rate up to 1.9%. Since this is very close to the Fed’s target rate of 2.0%, this will likely be taken negatively by the bond market.

Housing Starts for last month were reported with only a 0.2% increase for the month of July. This report measures the number of holes dug to begin the construction process. Although this was below expectations, the prior month’s report was revised significantly higher. The original release of 1.174 was revised up to 1.204 units, which represents a gain of 30,000 units. This made June the strongest Housing Start month we have seen in 8 years. With many of those new starts leading to closed transactions in the next 4-6 months, it will be a healthy sign for pending closings once the homes are complete.

From a technical standpoint, mortgage bonds are showing weakness and vulnerability. With tomorrow’s report providing the potential for further deterioration in the market, we will be switching to a locking bias. This is a highly volatile market we are currently in. With price swings moving rapidly from one day to the next, knowing when to lock is a difficult process. Be careful and don’t take more risk than you are comfortable absorbing.