26 Jun Awaiting A Stock Rally
Mortgage bonds remain trading in a tight range once again this morning, as investors await news to help decide the next direction of mortgage interest rates. Given the lack of improvement in the face of recent days’ stock market losses, there seems to be more risk of bond prices falling rather than improving. A rally in the stock market, which I see as probable in the days to come, will likely come at the expense of mortgage bonds. That could push bonds back beneath their 25 and 50 day moving averages, which would then serve as ceilings of resistance. We need to be mindful of potential strength in the stock market and be careful of rising interest rates.
In a time where experts believed that rising interest rates and lower tax rates would help boost banking stocks, the exact opposite is happening as of late. Under pressure of a flattening yield curve, bank stocks actually crossed their longest losing streak ever, which is 12 straight days. Contrary to what the Fed appears to believe, odds of a recession by the year 2020 seemed to have increased. This would clearly have a significant impact to the financial markets, which is causing some to consider exiting banking stocks early. As the yield curve flattens, and short term rates inch closer to longer term rates, you will see investors become more cautious on stocks that will be adversely affected by a recession. This will be an important gauge that we will continue to monitor.
We still see great risk of falling bond prices. We will maintain our locking bias.