Safe play is to lock

Stocks were unable to hold their gains and have dropped lower this morning.  The S&P 500 was able to close above the critical 1935 level at the end of trading yesterday.  However, they are now beneath this level.  If stocks aren’t able to regain their footing today, that will provide much needed support for mortgage bonds.

Bonds remain in their sideways trading channel, with room to go in either direction.  As the week moves on, the economic news becomes more significant.  Most importantly, on Friday we will receive the Fed’s favorite gauge of inflation by means of the Personal Consumption Expenditures (PCE), as well as a reading on GDP.  I suspect that we could see a break out in one direction or the other following the release.  I suspect that will be to the upside (improving mortgage interest rates), however, it could go either way.  Although we have received slightly improved news as of late, the drivers behind the data are somewhat skewed.  For instance, higher average hourly earnings were certainly influenced by three states and Walmart (employing 1,400,000 people) raising minimum wage.  We will have to wait and see what happens, but it is poised to be an interesting day on Friday!

With mortgage bonds trading in the middle of a sideways trading channel, they are subject to increased volatility.  We could see the “whipsaw effect” occur where bonds are snapped back to the bottom of the channel.  Since pricing has already improved from where rates started the day, the safe play will be to maintain a locking bias.