Locking bias

Worldwide economic news continues to show that economies around the globe aren’t doing as well as anticipated. We just learned that our friends to the north are now in a recession. Since Canada is closely tied to the US, this will certainly create some level of trickle down impact. News out of China also continues to show weakness, with the most recent report showing the lowest level in their Manufacturing Purchasing Managers Index that they have seen in 3 years. As a result, the DOW and S&P here at home are down nearly 400 and 45 points respectively. In addition, the stock market charts are showing a high probability of continued weakness and an increased level of risk.

The reality is that the Federal Reserve will need to raise rates here soon. However, there is no real history of a similar situation in times past where the Fed was forced to raise rates at a time with such worldwide economic slowing. The probability of a recession hitting the US is increasing as economies around the globe slow. Although there is no real justification to maintain rates near 0%, there is very little room for the Fed to push short term interest rates too much higher in the near term. When a move happens, it will likely be much slower than the last couple of times the Fed shifted into a more tightening mode. A hike in short term rates at this point could actually help mortgage bond pricing move higher, pushing mortgage interest rates lower.

In spite of significant weakness in the US and world stock markets, the bond market has made little improvement relatively speaking. It could take a major move to push mortgage bonds above their 200 day moving average. In the meantime, we can anticipate bonds moving in a sideways channel for the near term. Therefore, there is little incentive to float an interest rate.