The risk of floating is elevated

The bond market is relatively flat today, which is a good sign in light of a strong stock market. Economies around the globe continue to show disappointing results. Europe seems to be on the verge of initiating a new stimulus program to help boost economic activity. Further, China’s stock market continues to struggle, with the Shanghai Composite Index now down 39% from its peak in June. Given the integration of global economies, the trouble in both Europe and China are sure to impact the growth of the U.S. economy over time.

Tomorrow is day the Bureau of Labor Statistics (BLS) will release their estimate of job growth in the U.S. for the month of August. The markets are anticipating 220,000 new jobs created, with a drop in the Unemployment Rate from 5.3% down to 5.2%. There are several indicators that show the actual report could miss expectations. On Wednesday, we had the ADP job report that estimated only 190,000 new jobs. Further, the sample week of unemployment Claims that will be used to help compute the numbers showed a relatively higher week for people filing new unemployment claims. Although that is only a part of the overall equation, it helps support a lower level of growth. And lastly, it is the month when many students quit working and return to school. That tends to reduce the workforce and balance out some of the new job creations.

With today likely being a fairly flat day in the bond markets, the decision to lock or float should weigh heavily on your opinion of tomorrow’s BLS report. If you believe the report will be low, consider floating. However, if the report is stronger than expected, many will interpret that as a sign the Fed will raise rates sooner rather than later. Although that would likely be a good thing for mortgage rates long term, it could create panic in the bond makers initially. Therefore, the risk of floating is elevated heading into the BLS release.