26 Feb Bonds Break Above Trading Channel
U.S. stock markets are steadily climbing their way higher, working their way back to the record high levels they were at just prior to the market correction we experienced in early February. The resilience is a testament to the assumed strength in the economy and a clear sign that investors are getting more comfortable with the idea of higher interest rates. As rates move higher, corporations pay more to borrow money. This limits potential growth and eats at the net profits left over to be shared with a company’s investors. It also provides a headwind for stocks as many investors turn their attention to the higher yields now offered through the bond market.
Mortgage bonds remain above the top of the downward trading channel that has been in place for more than two months. This is great news for mortgage interest rates, as long as bonds are able to hold this position. There is currently a record number of investors holding a short position in the mortgage bond market. This means that more people than ever are betting on rates continuing to climb higher. If we see bonds continue to show hope, we will see a mass number of people having to exit their position, which will help support bond prices. We have a very important news week ahead. Hopefully the news will be bond friendly and we will see mortgage interest rates stabilize. If the news isn’t bond friendly, we can expect to get right back on the downward trading channel which will drive mortgage rates even higher.
There still remains a great deal of risk in floating. Therefore, the safe play will be to maintain a locking bias.