Speculation Surrounds the Fed

Markets remain in a state of limbo, with mortgage bonds currently trading in the middle of a wide range between their 50- and 100-day moving averages. With the pattern currently still showing bonds also still stuck within the downward trading channel that caused mortgage interest rates to move higher over the past two weeks, we could see bonds fall lower as the day wears on. Until the current pattern is broken, the risk of rates moving higher remains elevated. However, if the bond market can muster the strength to make a break higher, there is room for mortgage rates to improve in the near term before being challenged by the DMA.

With the Federal Reserve set to announce their interest rate decision tomorrow, we may see market volatility be elevated throughout the day. I suspect there will be many bond holders who sell off their mortgage bond holdings to avoid the risks associated with tomorrow’s big announcement. Although economic conditions continue to show a strong U.S. economy, I continue to believe that we will see a ¼% rate cut announced. There is wide speculation as to how both the stock and bond markets will react. With many stock investors hoping for a ½% cut, we could see a sell-off in the stock market if that doesn’t happen. Since stocks and bonds compete for the same investment dollars, that would be good news for mortgage interest rates.

Given that bonds remain trapped in a downward trading channel, we will maintain a locking bias.