Locking Bias

I can’t remember off hand the last time we started such a highly anticipated week in the markets. With the Federal Reserve set to announce their interest rate decision on Thursday, it seems to be drowning out all the media talk of the world ending this month and the predictions some believe about a major stock market crash that is supposed to hit this week. In fact, a few of the world’s leading investors such as Warren Buffet’s Berkshire Hathaway, have been dumping their investments in US Stocks that rely on consumer spending. Is there something more to this or is this just a rebalancing of their stock portfolios? At this point, it’s difficult to say. However, it is raising eyebrows of the smaller investors who have a strategy of following the “Smart Money”.

Although mortgage bonds remain within a tight sideways trading channel, it is likely that we will see an elevated level of volatility within both the stock and bond markets this week. Many investors will be sitting on the sidelines until they know how the Fed will respond. The Fed will have one more opportunity to gauge inflation before they make a final decision. On Wednesday we will receive an update on the Consumer Price Index (CPI). If it shows inflation on the consumer level has picked up, a rate hike will be more likely. At this point, bond investors are likely hoping for low levels of inflation followed up with a rate hike by the Fed to curb pending inflation. As we have learned from past experience, the Fed often waits too long before acting. This generally leads to more aggressive action down the road to keep inflation under control. Small moves beginning now can help to allow the Fed to make gradual moves over time vs. having to take more drastic measures later.

The decision to float or lock a rate this week is a difficult one to predict. If you believe the Fed will raise rates that could actually help improve mortgage interest rates. Although that seems to be counterintuitive, a rate hike shows bond investors that the Fed isn’t willing to allow inflation to take over. If the Fed decides to keep interest rates where they are, mortgage rates will likely move higher. Therefore, be very careful right now and remember that it is better to be locked and wish you were floating than to be floating and wish you were locked.