Locking bias

Mortgage bonds were able to muster the strength to break above their 25 and 50 day moving averages yesterday.  However, as we have noticed a trend the past few weeks, bonds are unable to maintain their position above these critical levels for much more than one day.  Therefore, the day following a rally generally tends to come with greater risk, high volatility and an overall weakness.  Since yesterday was a strong day for mortgage bonds, today is such day.  So far, bonds have tested the 25 DMA but have remained above.  However, chances are reasonably high that bonds will break beneath this level within the next day or two.

Although August has been a month of very little change overall in the bond market, this Friday could provide the catalyst to cause bonds to make a break in one direction or the other.  Since this is Jobs Week, tomorrow we will hear from ADP on their estimate of new job creations during the month of August, followed by the more important Jobs Report from the Bureau of Labor Statistics on Friday.  The consensus for Friday’s report is in the range of 180,000 new hires.  If the actual report is much stronger than this, bonds could break down, driving mortgage interest rates higher.  However, if the report is weaker than anticipated, we could see bonds build some strength in the near term.

Although bonds appear ready to make a break higher, there is great risk in floating.  Based on recent historical data, we will maintain our locking bias.