Is there risk in floating?

Mortgage bonds started the day lower, but have since moved back to neutral.  Stocks are moving higher after yesterday’s drop lower.  Speaking of the stock market, there seems to be an increase of economists who are concerned about potential weakness in the market.  Stocks are hovering near all-time highs.  With the extraordinarily high amount of corporate stock buybacks, combined with a steady influx of cash into the market spurred by QE3, the stock market has become top heavy compared to other economic indicators.  It appears to many to be an irrational market that has not priced in the end of QE3 or any other global event that could impact our markets, such as continued tension in the Ukraine.  It will be interesting to watch how stocks perform over the next several months.  Weakness in the market would help improve interest rates, while continued strength will be a headwind against the bond market.

Home purchase mortgage applications were reported to be up 9% this week.  Although still down 16% from this time last year, it is a strong comeback as we begin the home buying season of summer.  This is an encouraging sign for our overall economic health, as housing has almost always been the leading indicator in predicting future economic strength.

Productivity was reported to be -1.7% vs. the -1.2% anticipated.  A loss in productivity means that companies are losing efficiency, so labor costs tend to move higher.  Therefore, it was no surprise that Unit Labor Costs were reported to be up 4.2%.  Both of these are inflationary, and not friendly to the bond market.

Mortgage bonds have moved above the support that has held them back for more than six months.  A clean break above this level is very bullish for the bond market.  There is great risk in floating.  However, it bonds may find the strength to hold current levels.  We will suggest a locking bias for those not willing to take the risk of waiting to see how the markets play out.  If you choose to float, keep an eye on the market and be ready to lock if the bond market begins to lose steam.