Locking bias

Both mortgage bonds and the 10 Year Treasury Note lost their composure in late afternoon trading yesterday.  The downward pressure resumed again in early morning trading, forcing mortgage bonds to break beneath their 25 day moving average.  The negative sentiment in the bond market is partially driven by investors who are taking a safe position by selling their bond holdings ahead of the employment reports that begin tomorrow.  Once the ADP and Bureau of Labor Statistics (BLS) jobs reports are behind us, bond holders may be in a position to step back into the markets.  Until Friday, we will likely see an increased level of volatility. 

The US stock market is down sharply this morning, following lower than anticipated inflation news.  Personal Consumption Expenditures (PCE), which happens to be the Fed’s favorite gauge on inflation, showed a Core Rate increase of only 0.1% last month.  The year-over-year figure remained stable at a tepid 1.6% rate.  As we know, the Fed is looking for a rate of at least 2.0%, so we still have room for this to move higher before reaching the Fed’s target level.  Personal Income and Spending was also released, showing an increase of 0.2% and 0.4% respectively in the last month.  Income increase was slightly below expectations, which spending rose slightly more than expected. 

Bonds have since recovered their losses of the day.  However, this can change quickly.  If bonds make a decisive break below their 25 DMA, the next support level is 50 basis points lower.  Given the increased volatility, the safe play remains to have a locking bias.