Still risk in floating

Mortgage bonds had a strong day yesterday following the announcement that the International Monetary Fund (IMF) pulled the plug on providing liquidity to banks in Greece.  This caused their banking system to halt and for all their local banks to close.  However, they did allow ATM withdrawals up to $60 euro, which is the equivalent of $67 US dollars.  This created a flight to the safe haven of the US bond market, which helped boost mortgage interest rate pricing.  Bonds recovered the losses they experienced since Wednesday of last week.  However, the improvements were abruptly halted once bonds reached the top of the downward channel they have been trading in.  The fact that this news was not able to help bonds break out of this nasty cycle shows the overall strength of this bearish sentiment.

Investors received news that Consumer Confidence for the month of June is at 101.4.  This greatly exceeded the 94.6 reading anticipated, and shows that consumers are feeling much more optimistic about the future.  That is not good news for mortgage  interest rates.  Further, Chicago PMI was reported at 49.4.  Although lower than the 50.6 anticipated, it was better than the 46.2 reading from last month.  With the big news of the week still ahead, we could see volatility in the bond market increase.  Investors will be hesitant to make too large of bets before they learn of new job creations for the month of June.  This report will be released on Thursday morning by the Bureau of Labor Statistics (BLS).

With bonds unable to break out of this downward channel ahead of Thursday’s BLS report, there is great risk in floating.  We are going to suggest a locking bias to secure the gains received from yesterday’s improvement.