21 May Battle of the 200 day moving average
Mortgage bonds are currently in one of the most significant battles they have fought in a long time. This is the battle over the 200 day moving average.
If the battle is lost, we will likely see a long term trend reversal where we see rates head significantly higher in the coming months. If the
battle is won, mortgage bonds can get back on track and we can possibly see rates remain low in the short term. In the past two years mortgage
bonds have only battled the 200 DMA one time. They won the last fight and we saw mortgage rates improve more than 1% since the win. This
time, it may be the reverse of this scenario. We will have to wait and see what happens.
The “good news – bad news” scenario continues, with mixed economic data flooding the market. The one sector of our economy that continues to shine
is employment. In fact, today we received the Weekly Unemployment Claims for last week. It was reported that only 274k new claims were
filed. This is a very nice number, and shows that the job market continues to prosper. However, other indicators show that our economy
is slowing. The opposing views make it difficult to decipher what direction the overall health of our economy is taking. This is largely
to blame for the wild swings we are seeing in the bond market. Overall, it seems that even bad news is hurting interest rates. There is
no rhyme or reason to the markets’ reaction to economic data.
If mortgage bonds are able to break above the 200 DMA and remain there for an extended period of time, that would be a positive sign for mortgage rates.
However, although we see no immediate need to lock right now, at this point there is great risk in floating.