22 Aug No incentive to float
Mortgage bonds maintained above their 25 and 50 day moving averages, and were quickly met with their next ceiling of resistance. Once hit, they were quickly pushed lower and are now trading in a very tight range. Today alone, they have bounced from floor to ceiling, without a clear direction as to whether to break above or eventually fall below. After the stock market achieving new records yesterday, it is slightly lower so far this morning. If this weakness continues, that will provide support to the bond market and will hopefully allow it to muster the strength to make a run higher. We will have to see as the day plays out.
Fed President, Janet Yellen, is speaking today in Jackson Hole. Her speech was released and is currently being dissected. She is backing off a bit from her “slack” in the labor market comment, indicating there is more strength than originally given credit. There is dissention within the Fed, with some members pushing for an immediate rate hike, while others feel rates need to remain low well into 2015 or even beyond. Given the course they are currently on, the likelihood is that they will move rates higher in mid-2015. The markets have anticipated this, so there really isn’t much news that surprised investors.
With mortgage bonds trading in a tight range, there isn’t much incentive to float an interest rate. Potential improvements are likely small, and not necessarily worth taking risk in hopes of gaining. Therefore, we are going to maintain our locking bias. On most fronts, the economy is recovering nicely, which continues to add a headwind to mortgage rates. A significant drop in the stock market, or a surprising geo-political event could help push rates lower. However, without such events, we will likely remain in the range we have been trading all summer.