Locking Bias

Mortgage bonds failed to break above resistance.  However, mortgage rates are sitting at 12 month lows.  Yesterday’s news out of the Ukraine that Russia has moved into Ukraine only panicked the stock market for a brief moment before stocks once again pushed higher to challenge all-time highs.  The interesting point to note is that the recent rally in the stock market has done little to spook the bond market.  Bond investors clearly believe that the stock market is living in an unrealistic state of rainbows and unicorns, and presents a high level of risk of a correction.  We will have to see who is right, stock investors or bond investors.  Only time will tell….

Personal Income and Spending for the month of July were both reported to be below expectations.  This is positive news for mortgage rates, as an increase in income and spending tend to drive consumer prices higher.  With inflation being the arch enemy of bonds, the low levels of inflation give the Fed permission to maintain short term interest rates near 0% for the time being.  In fact, Personal Consumption Expenditures (PCE) was released this morning, showing an increase of only 0.1% for July and a year over year figure of 1.6%.  Since this is the Fed’s favorite gauge of inflation, a figure well below the Fed’s target of 2% is a good sign for interest rates.

With mortgage bonds still unable to break above the resistance level that has held them for the past 14 months, we are going to maintain our locking bias.  Next week will be the Bureau of Labor Statistic’s employment report, so we can anticipate a high level of volatility.  Although bonds are in an upward channel (decreasing interest rates), we expect for bonds to fall towards the bottom of the channel in the next few trading days.  This would be a healthy move in an overall improving bond market.  However, it will cause mortgage pricing to deteriorate, at least in the near term.