Locking bias

The Federal Reserve could rock the bond market once more this afternoon, as the Fed Meeting Minutes outlining their thoughts discussed in the October 28th meeting are set to be released at 12:00 pm MST.  Given the recent trend of optimistic comments made by individual Fed members, we could get a glimpse into the December meeting and the likelihood of a Fed rate hike.  It seems that with inflation ticking higher and the job market continuing to show improvement, a rate hike is becoming increasingly likely.  Given that most of the historical Fed rate hike targets have been accomplished, it’s approaching recklessness to maintain near 0% interest rates.  However, given the current state of the economic cycle, a rate hike could easily put the US economy into a slowdown.  This puts the Fed between a rock and a hard place as they decide the fate of interest rates.

Housing Starts, which measure new construction of homes, on a month to month basis were reported to be down 11% at a 1.06M Unit annualized pace.  Since this was the lowest level we have seen since last March, this adds concern of a slowdown in new construction.  Although this is a disappointing read on new housing starts, it must be put into perspective that we are coming off of very high levels from the spring and summer months.  Overall, demand is still high and at this point there is not an oversupply of homes.  This is supportive of home prices and could be viewed as a healthy move lower, as recent levels of construction were not likely sustainable.

With the Fed Meeting Minutes set to be released soon, we will maintain our locking bias.  Further, stocks remain very strong, which adds additional headwind to the bond market.  We are at a risky point right now.  Hopefully bonds are able to hold current levels.