Lately, mortgage bonds have been in the pattern of trading higher in the early hours of the market and then losing steam as the day wears on. This pattern was repeated yesterday, with markets actually closing below their opening price at day’s end. Fortunately, the 200 day moving average is still beneath current levels acting as support. As long as bond can hold the current channel, it will give the market time to gain strength to make another run higher. However, we may need something big to happen in order for bonds to get out of the rut they have been in.
The Consumer Price Index (CPI) for August was released this morning. The Headline number was reported at -0.2%, which was well below estimates of 0.0%. The Core rate, which excludes food and energy, was reported to be 0.0%, which is also below estimates of 0.2%. Year over year, both the Headline and Core numbers were reported to be 1.7%. Since CPI measures inflation on a consumer level, this soft report should have improved bond prices, adding downward pressure to interest rates. However, the impact was muted by the continued strength in the stock market.
Today is Fed Day! At 12:00 pm MST we will learn their decision, which will be to continue tapering and maintain short term interest rates where they are currently. Since their decision is a forgone conclusion, the markets will be looking for any changes in their tone. With the CPI report showing inflation well below their target range, it takes a bit of the pressure off to increase rates sooner than expected. Chance are that they will maintain their “extended period of time” language, which is being interpreted as sometime mid-2015.
Mortgage bonds have failed to show any level of strength. When you consider that the bond market typically performs poorly on Fed days, today will likely be volatile. As long as bonds remain above the 200 DMA today, we will have a cautiously floating bias. However, a break below would quickly turn into a locking stance. Any surprises in the Fed announcement could spark movement in one direction or the other. Watch carefully, we are likely in for an exciting day today!