Mortgage bonds are up slightly this morning, as they press up against the top of the downward trading channel. Although most mortgage advisors are seeing the current market as an opportunity to float your interest rate, this is actually a very risky position for bonds to be in. Generally speaking, when bonds are at the top of a trading channel, that is the time to lock a rate. Since the downward channel has been in place for more than a month, this is truly a strong channel for bonds to be stuck in. It will likely take a lower consumer inflation report from tomorrow’s Consumer Price Index report for bonds to break out of this channel. If inflation is stronger than expectations, bonds will likely be pushed down to their 200-day moving average.
Banks seem to be prepping for a turn in the multi-year long strengthening of the consumers’ financial ability to maintain their monthly obligations. JP Morgan Chase and Citigroup just boosted their reserves to losses in their consumer credit card portfolios. The extra money they are setting aside is clearly an indication that both companies feel that higher levels of credit card defaults are on the horizon. With consumer debt levels hitting multi-year highs, this is a negative sign for the outlook of the U.S. economy. When banks start betting against the consumer, that is reason for concern. Since banks have access to info the average American doesn’t, this speaks volumes for our futures.
With bonds remaining at the top of a downward trading channel, the safe play is to maintain a locking bias. If consumer inflation reports tomorrow show lower than anticipated levels, bonds may make a break higher. We will have to wait and see.