Mortgage Bonds Stabilize

The stock market ceiling we predicted in yesterday’s market update ended up holding yesterday.  In spite of stocks surpassing this level in mid-day trading, stock prices fell just beneath this level in late day trading.  This is a good sign for mortgage bonds.  If this does in fact prove to be at least a short term ceiling, this will help provide some much needed stability in the mortgage bond market.  The sharp rise in stocks has pulled money from the bond market as investors look to increase their returns by taking a chance with stocks.  If the stock market loses steam, we can expect to see more money flow into the safe haven of the bond market.  This could help mortgage interest rates at least slow the pace at which they have been increasing.

The Consumer Price Index (CPI) for the month of October was released this morning, showing that Headline inflation increased from an annualized rate of 1.7% up to 1.8%.  When taking out volatile food and energy prices, the Core Rate fell from 2.4% down to 2.3%.  Since the Core rate is what is widely used to peg market inflation rates, the bond market didn’t show much reaction to the news.  Also, since the Fed is more concerned about the Personal Consumptions Expenditures (PCE) rate, investors aren’t as concerned with a Headline CPI report coming in well above the Fed’s target rate of 2%.

Mortgage bonds remain beneath three key moving averages.  Therefore, we will maintain a locking bias.