Locking Bias

Stocks are recovering some of their recent losses, as the initial shock of the recent “Brexit” announcement seems to be subsiding.  Past history shows that investors often have short term memory syndrome when it comes to major economic events. The negative sentiment can quickly turn positive when large money traders see an opportunity to jump back into the market to buy stocks at discounted prices. We seem to have hit that point in the market today, with heavy amounts of capital now flowing back into stocks. This is hurting the bond market today, as the demand for mortgage bonds is weakening. However, it’s important to note that the “Brexit” vote will be certain to cause volatility in the days and months to come. Today’s stock rally may be short lived as the realities of this historical event seep in over time.

The third estimate for third quarter 2016 GDP was released this morning, showing and improvement of 0.3% from the last reading of 0.8%. This brings the current quarter’s estimated growth rate up to 1.1%, which is still far from impressive. Given the current anemic level of growth, it is still not the time for the Federal Reserve to consider raising short term interest rates. With the recent “Brexit” vote, a hike will be off the table for the time being.

With mortgage bonds trading near all-time highs, it would be very risky to suggest floating. Bonds have a history of sharp drops when reaching these inflated areas. Therefore, a locking bias is the safe play.