July 7

Following last week’s rough go in the bond market, Mortgage Bonds are attempting to rebound this morning.  Last week was a great one for the stock market.  However, stocks are struggling as we start the day.  The inverse relationship between stocks and bonds will likely continue to drive the markets this week.  If stocks fall from current levels, that will provide fuel within the bond market to improve interest rates.  However, if stocks continue their climb higher, it will likely be at the expense of mortgage bonds.  This will again pressure interest rates higher.

The greatest risk to the bond market, and potential driver of higher interest rates, is inflation.  There are several key indicators that we watch to predict where inflation is heading.  One such indicator is Capacity Utilization, which has been driving higher.  Based on historical charts, current levels of Capacity Utilization, the Consumer Pricing Index (a measure of inflation) should be at 3.5%.  This is significantly higher than the last reading of just over 2%.  If this indicator is accurate, we can expect both inflation and mortgage interest rates to take a strong jump higher in the near future.  Often times, knowing what to expect helps us make wise decisions.  This may be the warning sign of higher mortgage rates, so we are advising our clients to act accordingly.

With mortgage bonds currently showing strength, we are going to suggest a cautiously floating bias.  However, be watchful of economic news as it is released this week.  On Wednesday, the Federal Reserve will release their meeting minutes from last month’s Fed Meeting.  Should there be strong discussions of inflation revealed, mortgage bonds will likely be pushed lower, pressuring interest rates higher.  If current support in the bond market fails to hold, lock quickly.