Risk of floating is highly elevated

After yesterday’s significant losses in the bond market, mortgage bonds are recovering a bit today.  The Bureau of Labor Statistics (BLS) Jobs Report was released this morning, showing that more private sector jobs were created than the 190,000 anticipated by the market.  The report showed 211,000 new jobs created in the month of November.  There were also upward revisions to the prior two months’ reports that added an additional 35,000 new jobs to the economy.  In addition, the Unemployment Rate remained steady at 5.0%, while the Labor Force Participation Rate edged higher, coming in at 62.5%.  The saving grace to the bond market was that wage growth year over year numbers actually fell from 2.5 down to 2.3%.  This adds downward pressure to future inflation, which is very bond friendly news.

As far as the BLS report goes, this still gives Janet Yellen the green light to hike short term interest rates when they meet next on December 16^th.  At this point, we are anticipating a .25% move higher, which will be the first time the Fed has increased rates since June of 2006.  For the past 9.5 years, interest rates have either been on the decline or held steady, with the rate holding near 0% since December 16, 2008.  That means we have not had any movement in short term rates in 7 years.  Therefore, the market will soon need to learn how to adapt to a changing interest rate environment, which will likely increase volatility and uncertainty in many markets as well as industries.  The risk of a recession will certainly be elevated as a result.

Mortgage bonds remain beneath several significant levels of overhead resistance.  Therefore, the risk of floating is elevated.  We will maintain our locking bias.