Locking bias

Oil prices hit the psychological $50 per barrel level as the stock market climbed higher and the US dollar weakened. With worldwide oil prices tied to the US currency, a weakening dollar is pressuring the cost of oil higher.  This is the result of stronger forecasts of inflation here in the near term, which could be flattened if the Federal Reserve raises short term interest rates before we see inflation climb higher.  Although certain Fed members are taking about the possibility of a June rate hike, it is still not considered as a likely event. Generally, the Fed waits to hike rates until times when they have a live policy statement following their interest rate decision.  Since it will only be a prepared statement released to the press after the Fed meets in June, very few economists believe the Fed will make any significant changes. Historically, a rate change resulting from a Fed meeting where there isn’t a live discussion immediately after the announcement is considered to be an “emergency” rate hike. Current conditions don’t justify an emergency move, so most experts don’t fear a hike at this time.

After briefly falling below their 100 day moving average, mortgage bonds were able to get back on top of this critical benchmark.  The stock market is also approaching an important ceiling that could slow the growth in the market. This would help support mortgage bond prices and stabilize the move higher that we have experienced.

A longer term look shows that bonds are still considered to be in a downward channel. This continues to add risks to floating. Therefore, we will maintain our locking bias. Tomorrow’s news could prove to be significant enough to cause bonds to make a break in one direction or the other. For the sake of continued low interest rates, let’s hope the news is friendly to the bond market.