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Friday, January 29, 2016

Mortgage Bond Market Analysis - TGIF and BOJ

It's Friday and we've got more weak data and some craziness out of Japan.  Yesterday we had an anomaly in the market where both equities and bonds closed higher and this morning equities and bonds are both higher again.  The fact that oil has moved a bit higher is helping stocks while weak data and a surprise move from Japan to negative interest rates has caused a flight to safety with people moving money to bonds.  I can't imagine an investor who wants to pay for the privilege of owning Japanese bonds.  Negative interest rates erode wealth; in fact, wealth is eroded when the return on investment doesn't keep pace with inflation.  That said, the GDP reading from this morning shows there's not much to worry about on the inflation front with an annualized rate of .7% vs. estimates of .8%.

Chicago PMI:  In an absolute about face and huge surprise to the upside, the Chicago Purchasing Manager's Index which had severely disappointed as of late came in at 55.6 vs. estimates of 45 and previous of 42.6.  The FNMA benchmark bond is pairing back its gains on the news.  This is huge since a reading over 50 is expansionary and very good for the economy.  It's only one month so we will have to see what it does next month to see if the manufacturing sector might have some legs or if it was just an aberration.

The morning high for the FNMA bond had us above the most recent high of October 28th and was knocking on the door of October 2nd.  Currently, the benchmark bond is up 11 basis points which is 10 basis points above the 1st resistance level but nine basis points below the 2nd.  It is 19 basis points off its morning high and the RSI is showing overbought.  There is a fight going on between the huge beatdown from the Chicago PMI vs. the low oil prices and the negative interest rates from the BOJ.  I don't expect the bond to tumble anytime soon with that support but if we get other economic data that starts to show legitimate economic growth and the price of oil rises with any significance, then I would expect bond prices to erode and interest rates to rise.

Jobs Week:  Next week is the first week of February which means that we get the ADP Private Payroll Report on Wednesday, Jobless Claims on Thursday and Non-farm Payrolls and the Unemployment Rate on Friday.  There will be a fair amount of other data as well so keep on your toes if you or a client have a mortgage that isn't locked.  For now, I would float through the weekend since the BOJ thing and oil will likely support the current price at the very least and may push it higher if we get more weak data.  I would be leery about floating through the jobs reports; if you have a loan closing more than 15 days from now, I think it's save to float but as always, keep a close eye on the market.  If you have a loan closing within 15 days, I would lock.  I'd love to help with any mortgage clients you have and you can always feel free to contact me for the latest on the mortgage bond market and interest rates as well as loan program questions - 702-812-1214 or 801-853-8720 (  Make it a great day and a better weekend.

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