We will favor a locking bias

Mortgage bonds were finally able to break above their 50-day moving average in late day trading yesterday.  This move was fueled by statements contained within the Federal Reserve’s meeting minutes that stated the Fed has no plans to stop their reinvestment of proceeds from mortgage bonds back into the market.  This is a significant statement for mortgage interest rates, as the Fed is currently reinvesting between $8-9 billion per week back into the mortgage market.  If they were to stop this tactic, we would quickly see mortgage interest rates jump between .25% – .375% higher.  Bond traders clearly like the continued Fed support to help protect their investments.

The stock market continues to climb higher this morning, again setting new all-time high records.  Stocks are being fueled by statements made by the Secretary of the Treasury, Steven Mnuchin, that corporate tax reform could take place before Congress takes its recess in August.  This ambitious time frame has stock investors cheering, as a reduction to corporate taxes will help fuel stronger profits to corporations.  This move will lower the PE ratio for stocks, giving them more room to climb higher. 

These are historic times for the US stock market.  There has only been five times in its history when stocks have climbed as strongly as the run they are currently enjoying.  In each of the five examples, they resulted in stock market crashes or at least very choppy times for the stock market.  How long will this run last?  It’s difficult to say.  However, the longer it continues the greater the risk level of investing. 

Although there is no reason to quickly rush to lock, we still favor a locking position.  Bonds have not been able to maintain a position above their 50 DMA since early October of last year.  Therefore, chances remain strong that bonds will repeat old behaviors and lose steam in the near term.