Locking bias

The bond market continues to slide, as all-time high levels in the stock market suck money out of the bond market in search of higher returns.  Bonds are now at a pivotal point, with the 10 Year Treasury Note yield pressing up against the ever-important 2.18% level that it fought to break beneath for many months.  If this level fails to hold, we could see the 10 YTN yield take a more significant jump higher.  This will also hurt mortgage bonds, as the two competing investments tend to move in sync with one another.  Mortgage interest rates would take a step higher as a result. 

The Producer Price Index (PPI), which measures inflation on the wholesale level, was reported to be up 0.2% for the month of August.  Although this was lower than the 0.3% anticipated by the market, it is still a strong increase.  On a year-over-year basis, the number moved higher from 1.9% to 2.4%, which is only 0.1% away from matching the quickest pace of inflation since 2012.  Most of the gains in this report can be attributed to higher energy prices.  Since PPI doesn’t necessarily mean higher inflation on the consumer level, the market’s reaction was minimal.  Investors will be waiting for tomorrow’s Consumer Price Index (CPI) report, which could certainly influence the near-term direction of mortgage interest rates.

In the face of continued weakness in the bond market, we will maintain our locking bias.