05 May Tremendous risk in floating
Mortgage bonds continue heading lower as they ride a very steep downward channel. As we warned could happen in yesterday’s update, bonds were pushed
below a strong support level near the end of market trading for the day and are now heading down towards their 200 day moving average. We suspect
that bonds will find support at this level and should not break beneath the 200 DMA today. However, this is still another 25 basis points beneath
current levels, so there is more room to the downside before the market closes.
Bonds are heading lower just one day before the first of two employment reports are released this week. Tomorrow we will receive ADP’s estimate of
job growth for the month of April and on Friday we get the Mac Daddy report from the Bureau of Labor Statistics. Much of this move lower is likely
in anticipation of a stronger than expected reading on the job market. Since last month’s figure was disappointingly low, there is a good chance
that there were job creations that were pushed into the month of April which would make the pending report stronger than expected. We will have
to wait and see.
There is tremendous risk in floating right now. Therefore, we will maintain our locking bias. The downward pressure in the bond market is far
too strong to ignore. Unless bonds can stabilize soon, mortgage interest rates will continue to climb higher.