18 Dec Risk of floating and waiting is just too high
Mortgage bonds typically don’t perform well on days when the Fed speaks. Yesterday was no exception…. Mortgage bonds have lost significant ground following the announcement from the Fed that rates would remain unchanged for now, but that they are now “patiently waiting” until they increase the Fed Funds Rate. The change in verbiage from “significant time” to “patiently waiting” symbolizes to the market that we are getting closer to the day when the Fed moves interest rates higher. It is interpreted that it could now be as early as two Fed meetings away, which puts us some time in the spring of 2015. However, the truth is that inflation is so low that there is still a chance that the Fed will not make a change in 2015 at all. We will have to wait and see.
Between today and yesterday, the stock market has recovered most of their losses of the past couple weeks. It was a huge up day for stocks yesterday and we are seeing a continuation in the markets today. This is painfully creating losses in the bond market, as investors feel the time is right to position themselves for a move higher in interest rates. With the job market showing Olympic level performance, it is difficult to argue that interest rates should be as low as they have been. When you listen to pundits on TV you can sense the anger build up in many that the Fed has failed to make a move yet. However, in spite of a strong job market, there is still an underlying weakness in the economy. The Fed is fearful of making a move too soon that could wipe out the progress that has been made already.
Each day that passes without bonds being able to break above current resistance reduces the chances that bonds will make a break higher. It could be that the interest rates we saw a few days ago will be the lowest we will see in a while. At this point, it’s difficult to say. In the meantime, we are certainly maintaining our locking bias. If bonds show they have the strength to make a run higher, we will reconsider at that time. This risk of floating through this volatility has been too great.