In late afternoon trading yesterday, mortgage bonds lost their strength and closed beneath their 25 day moving average, resting right up against their 50 DMA. The weakness continued in early morning trading today, with bonds breaking well beneath their 50 DMA and hitting the bottom of the sideways channel in which bonds have been stuck for the past several weeks. However, bonds regained their strength after hitting the floor and are now battling to break above the 50 DMA once more. This consistent pattern has made August an extremely uneventful month for the bond market. However, tomorrow’s Bureau of Labor Statistics report could be the catalyst to cause a break out in one direction or the other.
The impact of tomorrow’s report is challenging to predict. Not only do we have to consider the chances of a strong vs. weak report, we must also consider the fundamental state of the bond market and consider possible reactions for both scenarios. Although a strong report provides the greatest threat to increasing interest rates in the short term, it will also spark fears within the markets of a Federal Reserve rate hike. That would not be received well by the stock market, which could help support mortgage rates. We can’t be certain of the outcome at this point. However, we see a higher probability of the results coming in close to or below the markets’ expectations. With that being said, each person must access their own risk tolerance when making a decision to lock or float.
Unless bonds break down mid-day, we would like to have a floating bias heading into tomorrow’s report. If you choose to float, however, understand that there is significant risk in doing so.