Locking bias

Mortgage bonds attempted to break above overhead resistance on Friday and were forcefully pushed back down this morning.  Since bonds have not been higher than this ceiling since May 10^th of 2013, the strength of this resistance has proven very difficult to penetrate.  If bonds are able to eventually make a break higher, there is quite a bit of room for bonds to move higher before facing the next major resistance level.  That would be the move that would take rates into historic low levels of interest rates seen in the past few decades.

There is a lot of economic news that will be reported this week, so we anticipate a high level of volatility.  Personal Consumption Expenditures (PCE), which is the Fed’s favorite gauge, showed tepid signs of inflation.  Headline CPE was -.02% for the month of December.  When stripping out food and energy, the Core CPI was 0.0%.  On a year over year basis, headline CPE dropped from 1.2% down to 0.7%, while Core CPE decreased from 1.4% down to 1.3%.  This is not the direction the Fed would like to see this move.  We believe that the lack of inflation in the market will tie the Fed’s hands when it comes to raising rates.  If we see any rate increase at all from the Fed it will be less than many anticipate.

Given the volatility this week will deliver, along with the reality that we are still at the very top of a trading range, we are going to suggest a locking bias.  Watch the 10 Year Treasury Note Yield closely.  It is currently at 1.68%, which is below a significant level of resistance.  A continued drop lower will help the mortgage bond market.