Locking bias

Stocks are sharply higher this morning, with the S&P 500 once again setting new all-time high records.  This move was heavily influenced by another strong report on the job market, with the Bureau of Labor Statistics (BLS) reporting 255,000 new jobs created in the month of July.  This number came in much higher than the 185,000 anticipated by the markets.  In addition, there were upward revisions to the prior two months’ reports, adding an additional 18,000 new jobs to the total.  The Unemployment Rate, which was expected to dip lower, remained constant at 4.9%.  Had it not been for the labor force participation rate moving higher from 62.7% up to 62.8%, the Unemployment Rate would have fallen. 

The strong BLS report would normally have had a more significant impact on the bond market than we have seen so far this morning.  However, the losses have been subdued by an increase in the chances of a Fed rate hike before the end of 2016.  Prior to the report, the chances of a Fed rate hike were at 32%.  This figure jumped up to 40% after the announcement this morning.  Since a Fed rate hike would be viewed as controlling future inflation, and as a headwind for the US stock market, many mortgage bond holders would cheer the news of a hike.  As we saw in December when the Fed increased rates for the first time in 9 years, mortgage rates like inflation protection. 

Mortgage bonds remain in the same sideways channel that they have maintained for weeks.  However, they are certainly at risk of falling.  Therefore, the safe play will be to advise locking in at this point.