Locking bias

Mortgage bonds are holding their ground as the markets await the formal announcement of a Federal Reserve interest rate hike that will be announced promptly at 12:30 pm MST. Since most have already accepted the reality of higher rates, we are hopeful that this increase is already baked into the price of mortgage bonds. However, since talks of rate hikes are not favorable for bond prices, we can anticipate a volatile day for bond prices. With mortgage rates right at 3 year highs, we remain at a pivotal point right now. If bond prices fall after the rate hike is announced, rates could quickly take a step higher.

The Consumer Price Index (CPI) for the month of February was released this morning. As we’ve warned in recent updates, the rate of inflation came in at a strong annualized rate of 2.7%. This is clearly well above the Fed’s target rate of 2%, as it nears the 3% handle. Although the Fed primarily considers the Personal Consumption Expenditures (PCE) rate for measuring consumer inflation, you can be certain they are closely watching the CPI numbers as well. This will be used as justification for today’s rate hike.

We could see bonds improve on the Fed announcement. However, there also exists a great risk of bonds falling even more. If you are risk adverse, as I am, locking is the safe play.