15 Jul Safe play is to lock
Mortgage bonds continue to get hammered, as they travel the path of a strong downward channel lower. At this point, the downward channel appears to be strong enough to push bonds beneath the floor of support that bonds were able to break above two days after the Brexit announcement hit the wires. If that happens, we could see a more dramatic move lower that will certainly push the APR on mortgage interest rates higher. Given the track record of how mortgage bonds perform after reaching levels we saw last week; it is likely that this will happen. History has a way of repeating itself. However, it does not mean that we will not see mortgage rates recover and fall back to where they were in the future, as that could certainly be the case. It is more an indication of what will happen in the market in the short term.
The US stock market is once again setting new all-time high records. This follows news that the Consumer Price Index is now at the highest rate in 8 years. There was an increase of 0.2% reported for the month of June, with a year over year increase of 1.0%. The Core reading, which strips out food and energy prices, was up 0.2%. Year over year, the Core rate rose from 2.2% up to 2.3%. This clearly shows that consumer inflation is heating up, which is not good news for the bond market. Since inflation is the arch enemy of mortgage interest rates, this news will help pressure interest rates higher.
We are now at a critical point in the bond market. If prices fall beneath support, rates will rise. Given the probability and risk of this happening, we will plan for the worse and hope for the best. The safe play will be to maintain a locking bias.