Locking bias

A terror attack in Belgium overnight has shaken the markets this morning. This terrible tragedy once again reminded investors of the global terror risks that can impact financial markets around the world. Stocks are currently feeling the vulnerability of fear, which tends to cause investors to sell stocks and move into the safer haven of bonds. This helped push mortgage bonds back above the floor of support they broke beneath yesterday. Although this force is currently helping support bond prices, a look back on history shows the short shelf life international attacks can have on the psychology of investors. They tend to quickly forget a short time after and reposition themselves back in the stock market once they feel the panic has passed. Therefore, this downward momentum in stocks could be brief. When sentiment reverses, we could see bonds take a hit as money is once again redirected back into the stock market.

A recent weekly commentary put out by BlackRock makes a strong argument for the continued reversal we saw begin in early February. This graphically supports stocks building upon the upward momentum and growing yields in fixed income investments (such as mortgage bonds).  If this proves to be accurate, we will see more money flowing out of the bond markets and into stocks. This would likely coincide with a continued climb higher in the price of oil and other commodities. This would be bad news for mortgage interest rates, which will suffer as investors sell their bond holdings in search of higher returns. Although it’s too early to make this prediction, the argument is certainly well supported and possible.

With mortgage bonds continuing to limp along with very little hope of an imminent strong rally, we will maintain our locking bias. When terror attacks aren’t dramatic enough to make significant movements in the market, it is clear we are becoming desensitized to threats that are very real to each of us. Our thoughts are with the families and friends of those impacted.