22 Dec Risk to float is too high-Locking bias
Mortgage bonds lost their battle with the 25 day moving average and are now falling towards the lows they hit just before the Federal Reserve announced a rate hike last week. Hopefully, they will be able to regain their footing before they hit their next floor of support. The drop in the bond market was precipitated by a report showing that GDP grew at a 2% clip. Although this was right in line with market expectations, it was only a slight decrease from the previously reported 2.1%. It appears that many investors were looking for a lower reading; therefore they sold bond holdings on the news. This report shows that growth in the US economy is still tepid and not improving at a rate that warrants excitement.
Existing Home Sales for the month of November were reported at a 4.76 million annualized pace. This is down 10.5% and was a huge miss from what the market anticipated. This pushed year-over-year numbers to -3.8%, which represents the first negative read on an annual basis in over 14 months. However, the drop was blamed on TRID, which apparently slowed many home purchases by pushing their close dates into the month of December. Therefore, it could be a temporary lull with a snapback next month when December’s home sales are reported. We will have to wait and see if this is the case before passing judgment.
Now that mortgage bonds have broken beneath support, we will suggest a locking bias. Until we can determine where bonds will find a bottom, the risk of floating is high.