01 Jun Prepare to lock
Yesterday’s bond market trading ranged from dropping below the floor of support, climbing above the ceiling of resistance and settling back down beneath the ceiling provided by the 50 day moving average. The volatility was across the board and triggered mixed news in the market as well as the US stock market having hit a critical ceiling and not having the strength to continue higher. Overall, this shows a resilience in the bond market that is much needed in order for mortgage interest rates to hold their ground.
Several high profile bond investors, including the legendary Bill Gross, are shifting their trades to better prepare their portfolios for a string of looming increases to the Fed Funds Rate. Over the past six-plus years, individual investors have had a difficult time earning a reasonable rate of return without facing the significant risks associated with buying more volatile asset classes, such as stocks. By holding short term rates this low for an extended period of time, it could ultimately create a situation that could further hurt the US economy. Therefore, it is widely believed that the Fed will have no other option but to raise rates at a reasonable pace in order to avoid a more serious financial crisis in the future. As we all witnessed in December when the Fed made their first move, this could cause a crisis in the stock market and actually help drive mortgage interest rates lower.
At this point, it is too early to call this a break out. The market could quickly shift and force bonds beneath the ceiling they surpassed in early morning trading. If you choose to float, do so only if you are able to keep one eye on the markets. Be prepared to lock if prices make a break lower.