Locking bias

Mortgage bonds fell down to the bottom of the channel we referenced in yesterday’s update.  We are now sitting near interest rate highs that we saw just before the Federal Reserve hiked short term interest rates.  This morning’s Personal Consumption Expenditures (PCE) report came in showing unchanged levels for the headline number and +0.1% for the Core Rate (less food and energy).  On a year-over-year basis, the headline rate grew at a 0.4% rate, while the Core Rate increased by 1.3%.  Although both are show very low levels of inflation, it wasn’t low enough to spark a rally in the bond market.


Personal Income and Spending both rose by an impressive 0.3% rate in the month of November.  On a year over year basis, spending is up only 2.9% compared to the 25 year average rate of 4.8%, which helps explains why GDP is lagging in the 2% range.  Of course, much of consumer spending was fueled by cash out mortgage refinance loans on overvalued properties to underqualified borrowers.  Although it filled our lakes with luxury boats and our roads with cars consumers truly couldn’t afford, we all know where that cycle led.  The restrictions in consumer lending have forced a level of responsible living that is more sustainable long term.  Consumers may not have the same level of material appeal, but I’m sure they are happier overall as a result.


Bonds are sitting on a very strong support level that has held for 14 of the past 15 months.  If you choose to float, do so carefully.  A break beneath this level would be damaging to mortgage interest rates.

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