Mortgage bonds failed to get the boost they were hoping for after the release of the Consumer Price Index (CPI) showed that inflation was hotter than expected.
It was reported that inflation increased by 0.2% for the month on both the Headline and Core levels. The year over year number showed that Headline
Inflation is -0.1%. Although this is a deflationary reading, it is due to the big drop we have seen in oil prices. When you strip out food
and energy costs, the year over year increase is 1.8%. This is higher than the 1.7% from last year, which created selling in the bond market.
A second blow to the bond market came when it was announced that Consumer Confidence is now at its second highest point since 2007. The reading came
in at 95.7, which was better than expectations of 95.0, and also better than the prior reading of 93.0. It is becoming even clearer that the
US economy is heating up. If the job growth continues at current levels, this will certainly take a toll on the bond market. The key things
going for the near term direction of mortgage interest rates are low yields in competing investment countries and low inflation. Outside of those
two factors, mortgage rates should be much higher. Therefore, this should be viewed as a short term gift.
Mortgage bonds continue to stay beneath the significant overhead resistance that has held them back for the past 2.5 months. Unless we see signs
that bonds will be able to break above this level, the safe play will be to remain with our locking bias.