Bonds Fall Hard

After breaking through the 200-day moving average, mortgage bonds have fallen dramatically.  A strong downward movement is typical after breaking through what is considered to be a long-term trend indicator, such as the 200-day moving average.  This could be the initial move that ultimately leads to seeing rates increase to levels we saw in late 2016 and early 2017.  This will largely depend upon the success of President Trump’s tax plan, which will certainly cause reason for panic in the bond market.  As we continue to hear of advances in the proposed bill, markets will continue to react. As a result, it’s likely we will see mortgage rates deteriorate as progress is made.

Durable Orders blew through already strong expectations, posting a monthly increase of 2.2%!  This was more than double the 1% anticipated. Of course, the hurricanes significantly contributed to this number.  With the number of cars purchased to replace weather damaged cars alone was huge. In fact, auto makers have put plans in place to increase production just to keep up with the demands of hurricane victims. The bad news for mortgage rates is that such purchases will contribute to an artificially strong GDP. Although the new purchases were not a result of a thriving US economy, the numbers will not distinguish the difference. As a result, this will put additional upward pressure on mortgage interest rates.

Mortgage bonds are now at the bottom of the downward trend line. They will likely bounce higher off this level. This could be an opportunity to float for a minute to see if pricing improves. However, since the downward trend line is steep, any potential improvements will be limited and not worth the risk of floating.