02 Jan Cautious float
Mortgage bonds opened the day just under a significant level of resistance that has held mortgage rates from falling below levels not seen since May of 2013. When bonds test significant levels, there is typically a strong break one way or the other. There was a build-up of excitement in the markets as investors watched and waited to see which direction rates would go. After an intense battle, the strength of the bond market prevailed and bonds pushed to levels not seen in nearly 19 months. However, we must be careful not to begin celebrating too soon. For bonds to decisively hold these levels they must close well above this critical level. Otherwise, they could be pushed back lower.
The first trading day of 2015 has little news, so the technical picture will be the primary driver of mortgage bonds. The stock market opened higher this morning but was pushed into negative territory when bond prices broke higher. If stocks continue to struggle today that will help provide support to the mortgage market. Also playing into the strength of the bond market is the 10 Year Treasury Note. The yield on the 10 YTN continues to fall and is now at 2.12%. This is beneath resistance and close to challenging the lows we saw in October.
With mortgage bonds currently above resistance, we will suggest a carefully floating bias. However, there may be an increased volatility in the markets today as investors watch to see if this higher move is decisive. If bond prices fail to hold we will quickly switch to a locking bias.