Mortgage bonds continue to stay well above support and are now trading in a wide pattern. The volatility in the stock market has been much more of a factor since the Fed ended their Quantitative Easing strategy. Overall this has proven to be a positive for the bond market. Bad times in the stock market have helped boost bond prices higher more than good times in the stock market has driven bond process lower. We expect the high volatility to be something that continues throughout 2015. Hopefully this will also continue to help support lower mortgage interest rates.
Today is a quiet news day. However, as the week progresses so will the economic calendar. As we often talk about, the two most important reports are GDP (Gross Domestic Product) and CPI (Consumer Price Index). This Friday we will receive another reading on CPI, which measures price movements on a consumer level. Since the Fed has not been able to stimulate inflation with Quantitative Easing, it is not likely that we will see a shockingly high report now that QE3 has ended. Inflation has been running near the 1.4% range, while the Fed has set 2% as their target. A reading higher than we have seen recently may cause the markets to panic, assuming markets believe inflation is now trending higher. However, a reading near or below where we have been running could help improve mortgage rates further.
With mortgage bonds continuing near the top of a trading range, we feel there is likelihood that bonds will soon fall and could test the bottom of the channel. This would be a healthy move for the bond market and would provide room for bonds to build up new muscle to make another attempt at a run higher. Therefore, we will suggest a short term locking bias for now. We continue to receive support from the 10 Year Treasury Note, which has maintained a position below a 2% yield. In fact, the yield on the 10 YTN is now at 1.92%. A close at or below this level will make this the lowest closing yield since May of 2013.