Bonds Remain In Longterm Downward Trading Channel

Both stocks and mortgage bonds are stable so far this morning.  With today being a light one for scheduled economic reports, markets will heavily trade based on the technical picture. In fact, all of next week will be relatively light as well. So the same technical concerns will take the spotlight.

From a technical picture, bonds are currently not far beneath their 50 day moving average. This poses a serious concern. When you look at a longer term bond chart you will see that the last time mortgage bonds were above this moving average was back in September. This means that for the past eight months this has provided a ceiling that has not been penetrated.  Therefore, it is unlikely that we will see a break through happen in the near term. This level will likely continue to push mortgage interest rates higher in the days and weeks to come.

Yesterday’s bond auctions were met with a good demand, which was instrumental in holding rates steady, for now.  With budget deficits now at record high levels, we will see an increase in the amount of government debt being financed through bond auctions. This added supply of bonds hitting at a time when we are losing much of the Fed’s support of making purchases will add upward pressure to interest rates.  This challenge will likely continue to worsen until we see more private money step back into the bond market. That would take a dramatic fall in stock prices to trigger.

With bonds remaining in a strong extended downward trading channel, we will maintain our locking bias.