Locking Bias

Mortgage bonds continue to drift lower again today, as they follow another failed attempt to break above their 200 day moving average.  In similar fashion to their last attempt, the loss has been dramatic in just a few days.  This primarily appears to be a technical move lower that is more driven from profit taking that occurs when at the top of a trading channel.  That is why we typically live by the rule – “float when at the bottom of a channel and lock when at the top.”  Breakouts are rare and most often impossible to predict.  By understanding this rule, we are able to predict short term interest rates with a high degree of accuracy.

The Producer Price Index (PPI) for the month of July was reported at +0.2%, which was higher than the +0.1 % expected.  Core PPI, which subtracts food and energy, was reported at +0.3%.  This was also hotter than estimates of +0.1%.  Year over year PPI now sits at -0.8% and Core PPI is at +0.6%.  It must be remembered that PPI measures inflation on the producer level, not the consumer level.  Therefore, this report is often overlooked.  It’s not always an indication of pending inflation on the consumer level, as price increases on the producer side aren’t always passed on to consumers.

Mortgage bonds remain range bound, with little hope of any meaningful improvement today.  Therefore, we will maintain our locking bias.