Locking Bias

Mortgage bonds are trading between their 50 and 100 day moving averages, waiting for news to push them in one direction or the other. Bonds will soon be forced to make a decision, which could result in interest rates taking a step higher in the near term. Although it seems that the first quarter of 2017 will show weakness in the US economy, it seems imminent that the economy will be stronger in the remaining quarters of this year. This will likely lead to higher mortgage interest rates as we move into the summer and fall months.

Oil prices have moved up sharply in recent days, as global gasoline supplies shrink. Rising oil prices continue to be a significant threat to the US bond market, as inflation projections will climb higher as oil prices rise. As inflation heats up, it diminishes the real rate of return of fixed income assets such as bonds. As a result, bond investors will demand a higher rate of return to make up for the returns lost due to higher inflation. This will cause mortgage interest rates to move higher. Therefore, oil prices need to be closely watched as a gauge of the direction of mortgage interest rates.

Unless bonds are able to muster the strength to break above their 100 day moving average, we will maintain our locking bias.