Locking bias

Mortgage bonds are trading just beneath a triple layer of overhead resistance created by their 100, 25 and 50 day moving averages.  This is a very difficult ceiling to break above and will likely put a lid on mortgage bond prices, at least in the near term.  However, not all hope is lost. Technically, mortgage bonds are still in an upward treading channel. The hope will be that bonds can maintain above the bottom of this range until there is negative economic news that can help bonds make a break above the triple layer ceiling. If Friday’s GDP report shows weaker than anticipated economic growth, we could see this happen. However, the sense is that although not strong by any means, GDP will show a slow grind higher from where it started in early 2016. At this point, most investors have become accustomed to lackluster growth and look for any reason to celebrate. If that’s the case, we could see bonds break below the upward channel and travel back to the lows we saw a couple weeks ago.

Earlier today, St. Louis Fed President and current voting member, James Bullard, stated that he believes a single 25 basis point Fed rate hike is necessary. This is significant because at the last Fed meeting on September 21st, he voted against a 25 basis point hike. Given the number of Fed members who have recently announced their support for a rate increase, it seems there has been a shift in the mindset of many members. Although they are not supposed to have political motives in their vote, it’s still not likely that we will see a rate hike at their next meeting, from which the results will be announced just 6 days ahead of the Presidential Election. Since a rate hike could create a headwind for the stock market, that wouldn’t look good for the incumbent party.

With bonds facing a triple layer of overhead resistance, we will maintain our locking bias.