Carefully float

Mortgage bonds broke above the strong downward channel yesterday.  This channel drove mortgage bond pricing to nearly a three-year low, driving mortgage interest rates up to match highs of the same time.  If bonds can maintain their position above this channel, we could see the recovery in the bond market continue.  Although there is little chance that interest rates will be back to the lows we had in October, rates could improve from the levels we are currently at.  In fact, they are nearly back to where they were just prior to the Federal Reserve interest rate hike.  As we stated shortly after the hike, rates are quick to move higher and slow to improve.  That’s exactly what we are seeing now. 

The stock market struggled a bit yesterday, which could partially be due to the dynamic of portfolio managers rebalancing their mutual fund holdings to match their stated allocation of stocks, bonds, cash and other assets.  We could see a bit more of a selloff in January, as more rebalancing occurs.  Further, some investors may be wanting to sell stocks, but holding off until after the new year to defer the capital gain taxes until 2017.  These variables bring good news to the near- term direction of mortgage interest rates as we head into a new year. 

Although there is no immediate need to rush to lock, bonds are now facing a duel layer ceiling of resistance.  If they can break above this level, we could see a nice improvement.  If you choose to float, do so carefully.