If you choose to float, watch very closely

Mortgage bonds are doing well today after receiving a boost from a low Employment Cost Index (ECI) report.  This report measures changes in employment costs (wage growth) from quarter to quarter.  Today’s report showed a year over year wage growth rate of just 0.2%, which is the worst report on record.  Wage based inflation is one of the arch enemies of the bond market, so this surprisingly low number was very friendly to help support continued low mortgage interest rates.  Further, since inflation is one of the primary drivers behind the Fed’s decision as to when to increase short term interest rates, the stock market took the report as a sign that the Fed may delay their timeframe and rallied on the news.

Alan Greenspan is back in the headlines today.  He recently made a comment that the US economy is now in a danger zone.  His fear is that social services (such as social security, disability and welfare) have increased from 15% of GDP up to 19%.  Based on his statement, it is easy to decipher that his concern is whether we can sustain the current level of entitlements and people dependent upon the government for their source of income.  The Labor Force Participation Rate has recently dropped to levels not seen in many decades, partially as a result of the increase in the number of people receiving entitlement benefits.  That has helped drive our Unemployment Rate lower, which is not a true sign of a strong employment market.

Next week is Jobs Week, so volatility will likely increase.  Bonds have moved higher, improving mortgage pricing.  This makes now a great opportunity to lock in at lower interest rates.  If you choose to float, watch the markets closely as sentiment can quickly reverse.