After touching new all-time high levels on the S&P 500, stocks are now in a risky position. This is the point they hit a couple weeks back and immediately retreated lower, helping improve mortgage interest rates in the process. Although I believe it was a technical move to the downside, media pundits blamed the pessimism on the Trump/Russia news. Since the potential impact to that ongoing saga has not improved and stocks are once again at all-time high levels, it will be interesting to see how the media spins another drop if stocks do in fact fall. Once again, this would be a technical move that would be driven by investors desiring to cash in on recent gains and take some chips off the table.
Minutes released yesterday from the federal Reserve’s most recent FOMC Meeting finally provided clarity as to how the Fed plans to reduce its inflated balance sheet. As we anticipated, it will be a tapering of the reinvestment of proceeds from current investments owned by the Fed as they are paid back to the Fed. Because both mortgage backed securities and 10 Year Treasury Notes have fixed terms, the unwinding will take many years and will start out slowly. As a result, we will see upward pressure on mortgage interest rates when they slow their reinvestments. However, it won’t be as dramatic of an increase as if they were to sell their holdings to aggressively wind down its balance sheet. This is as good of news as the bond market could hope for.
With bonds remaining trapped in the same sideways channel with little significant improvement, we will maintain our locking bias.