Locking bias

Mortgage bonds opened up beneath support and have formed a downward trading channel. This is not a good thing for the near term direction of mortgage interest rates. Most of the recent weakness had been shaped by seemingly strong economic data that has been released, including Friday’s BLS Jobs Report. However, the truth behind the report is not as strong as headlines reflect. In fact, a large number of the new jobs created were in the bar and restaurant industries. As we know, these typically offer the lowest levels of pay on the 12 measurements of BLS pay structures. Therefore, these aren’t generally economy strengthening positions that forge stronger housing or big ticket purchases.

Bonds seem destined to drop down to test the next floor of support, which is currently about 30 basis points beneath current levels. This would reflect nearly a 50% downward correction since bonds hit their high point of 2016 in early February. Believe it or not, that level of correction can actually be a sign of strength in a longer term upward climb higher. It could turn out that bonds regain steam in the weeks to come and climb back to make another attempt at setting new records for 2016. When we hit that point, we will have to watch closely to see if that’s how things play out. In the meantime, base your locking decisions upon facts that are clearly known, which aren’t friends to the direction of interest rates.

Given the current trend of weakness, combined with the formation of a downward trading channel, we will maintain our locking bias.