Bonds Break Critical Support

After showing signs of strength yesterday, mortgage bonds experienced another gap down opening this morning. Yesterday’s strength pushed bonds above their 200-day moving average.  Although they were able to close above this critical level, they were quickly pushed back below at the opening of trading today.  This signals significant weakness in the bond market and sets the stage for higher rates ahead. Further, this morning’s weakness also pushed the yield on the 10 Year Treasury Note above the 2.385 level, which was acting as a strong ceiling of resistance until now.  There is now only one significant ceiling holding the 10 Year yield from rising back towards the 2.6% range we experienced when mortgage interest rates peaked earlier this year.  That was a terrible time for the housing and mortgage markets. Hopefully we don’t experience that again anytime soon.

The key behind the weakness in the bond market is primarily driven by irrational strength in the stock market. In fact, the S&P 500 has experienced record weekly closes for 6 straight weeks and monthly closes for 7.  Further, there has not been more than a 3% drop from record highs for 242 consecutive trading days.  This has never been accomplished in the history of the US stock market.  Overall, this run has certainly surpassed what many would describe as irrational.  With tax reform and some level of Obamacare repeal considered possible to likely, the run may continue.  Since bonds and stocks compete for the same pool of investable money, a continued run higher in stocks will add additional pressure to mortgage interest rates.  Not great news for the mortgage and housing markets.

Bonds are still under significant pressure. Although many advisors were suggesting floating the past few days, we seem to have made the correct call by having a locking bias.  Until bonds show signs of strength, or breakout of this brutal downward channel, we will maintain our locking bias.