Locking bias

Mortgage bonds are slightly lower this morning following ADP’s strong report for job growth in the US labor market in the month of March.  With expectations of only 185,00n new jobs created, the stock market is celebrating the 263,000 new hires reported.  Since March is historically not one of the stronger months of the year, it is an exceptionally bullish sign to see such a strong report.  The other key consideration is that we could now have the stage set for a stronger than expected Bureau of Labor Statistics (BLS) report when that is released on Friday.  Further, the job market will likely heat up even more as we move into the warm months of summer, when job growth is typically higher.  This will certainly pressure mortgage interest rates higher over time. 

 

The Federal Reserve’s Open Market Committee meeting minutes showed that most Fed members favor a reduction to the Fed’s balance sheet beginning later this year.  Essentially, this would be unwinding the massive Quantitative Easing (QE) program that was largely responsible for driving mortgage interest rates lower over the past few years.  Reversing QE will have the opposite effect, which means mortgage interest rates will be driven higher in the months/years to come.  Given that the Fed owns more than $1.7 trillion of mortgage backed debt, unwinding this will be a slow and grueling process for mortgage market to bear. 

 

Given the upward pressure to mortgage interest rates, we will maintain our locking bias. 

 

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