Locking bias

What happens to the U.S. stock market when the President of the United States verbally threatens to destroy another country and its citizens?  Well, stocks hit new all-time high record high levels. This seems to be an interesting response, given the increasing likelihood of a military strike involving North Korea in one way or the other.  If this were to happen, stock investors would then be quickly moving out of stocks and likely into the safe haven of government notes and mortgage bonds.  However, as we wait to see what happens, the stock market will continue to show irrational judgement and extend the winning streak a bit longer.

Mortgage bonds remain trapped between their 25 and 50 day moving averages. This well-defined channel could help provide a bit of stability, which is a welcomed sign after the losses bonds endured the past two weeks.  As long as the 50 DMA holds, bonds can take the time needed to decide which direction they will head next.  Tomorrow afternoon will be the Fed announcement of interest rate decision and Fed policy going forward.  Although the Fed will not be increasing rates, we feel there remains a good change they will announce Quantitative Tightening.  This could cause panic in the bond market, leading to another step higher in interest rates.

Given the risk of the bond market acting adversely to tomorrow’s Fed announcement, we will maintain our locking bias.