Falling oil prices are once again pressuring the stock market lower. Oil has given up their recent gains and is now trading back in the $30 per barrel range. Although this is bad news for the US stock market, mortgage bonds are improving as money is flowing outside of stocks and commodities and into the bond markets. In fact, mortgage bond pricing is now within a hair of the best rates have been since last April. Further, after touching the bottom of the upward trading channel, bonds were forced higher and are now trading in the middle. As long as mortgage bonds remain within this range, rates will improve. However, at some point in the near term, we anticipate that bonds will be forced to take a step back.
The probability of the Federal Reserve actually cutting interest rates by the end of 2017 is growing. In December, the US Central Bank raised short term interest rates for the first time in 9.5 years. Since then, the US stock market has suffered significant losses and mortgage interest rates have improved. Further, inflation and oil prices have actually moved lower. In a repeat of history, the Federal Reserve once again misjudged the US economy’s ability to sustain higher short term interest rates. At the time of the hike, they projected 4 additional rate hikes in 2016. The chances of this happening are highly unlikely. For now, the Fed may be able to influence more stability in the US stock market by detracting this expectation. Although it hasn’t happened yet, we anticipate that will be coming.
The risk of floating remains elevated. However, at this time there is no need to rush in to lock. Because sentiment can reverse quickly, only float if you are able to watch the market closely. If bonds begin to lose steam, the safe play will be to lock in.