Safe play is to lock

Both mortgage bonds and the 10 Year Treasury Note are getting squeezed this morning, with mortgage bonds barely hanging on to support provided by their 25-day moving average.  Bonds will soon be forced to decide as to which direction to take. If they happen to make a break lower, we will likely see rates under pressure, as the next floor of support is roughly 40 basis points lower. We are hopeful that bonds will wait until next week’s heavy news reports before they decide.

This morning we learned that 1st quarter GDP rose as at anemic level of 0.7%. This was well below the markets anticipated 1.2% rate of growth. Generally, the first quarter of the year is considered a “throw away” report, as growth is typically much lower than in the following three quarters of the year to follow. Therefore, markets aren’t reacting too much to the news.

Next week will bring significant reports, including the Fed’s favorite gauge of consumer inflation. If PCE comes in higher than expected, bonds will respond negatively. Further, next week is Jobs Week, where we will receive estimates of employment growth from both ADP as well as the Bureau of Labor Statistics.

With bonds hopefully remaining steady, there is little incentive to float. Therefore, locking is the safe play.