Locking Bias

Mortgage bonds broke below the triple layer of support yesterday following the release of the Federal Reserve’s FOMC meeting minutes.  The mixed  hawkish / bearish tone of the meeting spooked some investors, causing a bit of a panic in both the stock and the bond markets.  The overall message points towards a continuation of tapering.  We feel the majority of the benefit of QE3 was felt by the stock market, as the mortgage rates fell very little from the point at which the program was announced; however, the stock market had tremendous gains since the inception of QE3.  Therefore, as they wind down the program, stocks are very vulnerable.

The S&P 500 hit within a whisker of all-time highs yesterday.  As we have talked about a lot lately, we are concerned about a sharp fall in the stock market after reaching these levels.  Yesterday’s peak created the “double top” that mentioned in prior reports, which if history repeats itself, may lead to a correction in the market.  Should this happen, mortgage bonds will likely benefit.

CPI was up .1% for the month of January, and 1.6% year over year.  With inflation this tame even after trillions of dollars in Federal Reserve stimulus, it points to overall weakness in the economy.  Also released today was the Weekly Initial Jobless Claims, which came in at 336,000.  This was virtually in line with expectations, and further supporting a tight range very close to this level.  Although much better than prior years, it still isn’t strong enough to say that our job market is strong.

With mortgage bonds facing significant overhead resistance, we will have a locking bias.  We will closely watch the stock market over the next few sessions, as potential weakness in stocks may provide support to the bond market.  However, we still feel it is more likely that the bond market will face a short term down trend that could cost another 120 BPS loss in the bond market, causing interest rates to jump another .25% higher in a short time frame.