Safe play is to lock

Mortgage bonds continue to ride the bottom of the channel, as investors patiently wait for tomorrow’s highly anticipated Bureau of Labor Statistics report on the job market.  In the meantime, the overall sentiment in the bond market continues to be negative, with bond prices flirting with support and then recovering.  The primary source of upward pressure on mortgage rates continues to be an over exuberant stock market which is now celebrating its 6^thyear birthday of being in a bull market.  The length of time the stock market has experienced a bull market is currently the fourth longest in history, with only two months away from moving into the third longest bull market ever.  When you consider that recessions tend to be cyclical, occurring every seven years on average, we will at some point see stocks turn negative.  When this happens, mortgage bonds will be the beneficiary.

Overall, economic news of late has been leaning negative, which should be helping support lower mortgage interest rates.  However, the impact of the news has done little to slow the stock market.  This morning we learned that 320,000 new Unemployment Claims were filed last week.  This was an increase of 7000 over the prior week’s 313,000, and much higher than the 300,000 claims the market anticipated.  This was the highest number of new claims we have seen in 10 months, with now the last three out of four claims exceeding 300,000.  This is not a good sign for the job market.  Further, it is a clear indication that the drop in oil prices is impacting our job market.

Deciding whether or not to lock going into tomorrow’s BLS Job Report is a difficult decision.  The report will likely send bonds below current support or it will push bond prices higher.  Either way, there is great volatility ties to the results.  The safe play will be to lock.  However, with the energy sector creating as many job losses as it has, we aren’t sure where a significant growth in the market could come from.  In fact, the energy sector was responsible for 40% of the job gains during our economic recovery.  Not that the pendulum has swung the other way, that segment will be contributing to more losses than gains.  Therefore, there may be an opportunity in this report for rates to improve a bit.  We will have to see how the numbers play out.