Mortgage Mike’s Daily Rate Commentary

Mortgage bond prices continue to head lower as the downward trading channel drives mortgage interest rates to multi year high levels once more. The last time we saw mortgage rates this high was about four years ago.  This is terrible news as we head into the stronger home buying season of summer.

The 10 Year Treasury Note yield is currently at 2.99%, which is just beneath the critical level of 3.04% that we talked about a couple months ago.  We have to go back many years to find a point in time when the 10 YTN yield was above 3.04%.  A break above this would again be a bearish sign that mortgage interest rates will likely continue to climb higher.  However, it is likely that we will see yields bounce lower if they hit this level.  That could help stall the sharp rise in mortgage interest rates and allow the markets time to regain strength.  Since this move is largely a technical one, that seems to be the likely scenario.  However, the surge in yields is driven by higher commodity prices, not by economic gains.  So that adds an interesting influence to the current rise in rates.

Stocks continue to fall in a clearly defined downward trading channel.  If the downward trend continues, that could help stop the fall in mortgage bond pricing.  My guess is that several factors will align at the same time to help stop rates from climbing much higher.

With mortgage bonds still under pressure, we will maintain our locking bias.

After falling to multi year lows, mortgage bond pricing improved near the end of the trading day yesterday.  However, this morning they broke beneath the floor of support.  This places mortgage interest rates at multi-year highs, which is not good news for home buyers preparing to move as the purchase season begins to heat up.  Bonds are in a clearly defined downward trading channel that could continue to push mortgage interest rates higher. With no clear end in site, it’s difficult to say at what point this cycle will end.  Bonds are in a territory that they have not been in for a number of years, making this move more difficult for analysts to anticipate the next move.

Today is a very light news day, so the technical picture will once again heavily influence the markets. We are in a similar situation to yesterday, with both stock and bond prices falling. Since they generally move in the same direction, this activity is unusual.  Falling stock prices typically help improve bond prices. But that isn’t the case currently.

With bond prices continuing to weaken, we will maintain our locking bias.

Stock and bond markets are all at critical levels this morning. As for the stock market, the charts show they are now at the peak of a longer term downward trading channel. Although stocks have shown tremendous strength lately, they could very well stumble at this point. Pre-market trading shows that stocks are in fact pointed slightly lower. I would expect to see the momentum of losses in the stock market accelerate as the day wears on.

Bond prices are at the bottom of their support levels. A break below current levels will place mortgage interest rates at multi-year highs. Bonds experienced a gap down opening this morning, so we may see prices improve later in the day as the markets look to close the gap. We are hopeful this level will hold. If it doesn’t, we have to look at charts from years ago to see where the next support levels are at. It seems there could be support about 30 basis points beneath current levels. Let’s hope we don’t need to test this, as that would establish new territory for bonds to explore in the weeks or months to come.

The economic news of the day is not considered significant, so the movements in the markets are heavily based on the technical picture. As long as bonds don’t close beneath the current floor of support, we could see bond pricing improve in the near term. Let’s hope for the best but plan for the worst.

Although bonds should bounce higher, there is great risk in floating. We will maintain our locking bias.

Mortgage bonds continue to bounce from the top of the trading range to the bottom, as the market trades within a very tight channel.  Bonds are currently trading lower and are now once again nearing another floor of support.  We will likely see further deterioration before markets begin to improve.  However, since there are a couple floors of support beneath current levels, hopefully the downside move will be limited.

Oil prices just hit a 3 year high, which you may have noticed last time you filled your car up with gas.  This is generally a negative signal for the bond market, as it tends to trigger higher inflation as manufacturing and delivery costs rise with the higher oil prices.

The spread between the 10 Year Treasury and the 2 Year Treasury just dropped to a low that we haven’t seen since 2007.  We all remember what happened shortly after that time.  If the longer term rates don’t move up with the Fed Funds rate after the next Federal Reserve rate hike, we will see the yield curve narrow even more.  Although a cross-over in the yield curve doesn’t mean a recession is imminent, it has accurately predicted the last 7.

Until bonds are able to show the strength to break above the trading channel, we will maintain our locking bias.

Bonds responded yesterday as expected, bouncing off of a floor of support. Further, stocks lost steam after hitting a ceiling of resistance. This morning, however, stocks are climbing higher and are once more attempting to make a breakout above their 100 day moving average. This is the last significant moving average holding stocks back from making stronger gains.  A longer term look at the charts shows other potential ceilings that could cause the stock market rally to stumble. But with the short term upward trading channel firmly in tact, it seems stocks could have the strength to break higher. This could put bonds under enough pressure to cause them to fall to the next floor of support, which is roughly 40 basis points beneath current levels.  I see stocks possible stumbling when they hit the longer term downward trend ceiling. Which means I believe the losses in the bond market will be limited. But as always, anything can happen.

According to Morgan Stanley, the U.S. stock market may be at the end of its upward cycle. According to the report, “markets are closer to the end of the day than the beginning.”  This falls in line with what I have talked about in recent weeks. With the tax plan and current fiscal stimulus already priced into the markets, the longer term logical move would be for the stock markets to soften. P/E ratios have hit levels that are nearing the same true rate of return as mid-term bonds are currently offering. This means that investors can achieve the same true return in the bond market as the S&P overall is earning based on the price of the their stocks. This is generally an indication of a near term reversal which would help the bond market and hurt the stock market. History shows that it isn’t a matter of if, it’s a matter of when. With the current bill market now at a record time line, the markets are over due for a shift.

Because the trading channel is tight, there is very little benefit of floating. Things will likely get worse before improving. We will maintain our locking bias

Shortly after more than 100 cruise missiles smashed into Syria, President Bashar al-Assad showed his resilience to the attack by walking confidently through the gates of his palace.  The attack, which was from the combined efforts of the U.S., Brittan and France, destroyed military positions and research facilities linked to chemical weapons.  With Russia, Iran and Hezbollah supporting Syria, the risk of retaliation against the United State is certainly something to consider.  However, U.S. investors feel the chances are slim, at least at the current moment.  Considering that Russia said there will be “consequences” for the attack, investor optimism may be pre-mature.  I expect this to be an ongoing issue that will add to stock and bond volatility as the days and weeks move on.

As we would expect, after hitting the top of the trading range several days ago, mortgage bonds have worked their way to the bottom of the channel.  This will likely be the point at which bonds bounce higher and regain some of their losses.  This tight trading range has been in place for several weeks and has held mortgage interest rates somewhat steady for the time.  If stocks continue to rally higher, we could see bond prices break beneath their floor of support, driving mortgage interest rates higher in the process.  Since breakouts are rare, we anticipate more of the same in the near term.

With bonds trading in such a tight range, there is more risk to the downside than hope of rates significantly improving.  As a result, we will maintain our locking bias.

Stocks are facing a huge test today, as they are about to challenge some important ceilings of overhead resistance.  Given the volatility within the markets as of late, it will be a major accomplishment is they are able to make a break higher. However, general rules would suggest they will fail this test and end up falling lower as the day wears on. That would help mortgage bonds.  We will have to see how things play out today.

Mortgage bonds had a rough day yesterday. Bonds were forced to make a decision as to whether to break above the ceiling or fall beneath support. Unfortunately, they lost the battle and are now once again beneath their 25 day moving average. This is terrible news for mortgage interest rates, as they now have to face this critical level as a ceiling.  It will likely take some dramatic news to help bonds improve.  However, with the level of volatility in the stock market, combined with geopolitical news, anything is possible.

Unless bonds are able to break above their 25 day moving average, we will maintain our locking bias.

According to President Donald Trump, relations between the United States and Russia have never been as bad as they are right now, and this includes the Cold War. President Trump went to Twitter to warm Russia to get ready for a U.S. missile strike on Syria over a suspected chemical weapon attack. His message received a quick response from Russia that they will shoot down any missile we fire. They went on to warn that if any Russian assets are hurt, they will respond with a counter attack on the United States.

 

According to a Mideast analyst at the Russian Institute of Studies, which councils the Kremlin, the risk of military conflict between Russia and The United States in Syria is very high. This is clearly not a positive development for our country and would take a toll on the financial markets. Although not down too far this morning, stocks are showing signs of concern.  This is helping the bond market to maintain its current position as investors move money into the safe assets such as mortgage bonds.

 

This morning’s Consumer Price Index (CPI) report confirms that consumer inflation is advancing as anticipated. On a year over year basis, Headline inflation moved from 2.2% up to 2.4%. When stripping out food and energy prices, it increased from 1.8% up to 2.1%. With both figures now over the psychological 2% level, this move is significant. If it continues to climb higher, the Federal Reserve could decide to raise rates at a more rapid rate.

 

After closing out the day yesterday beneath their 25 day moving average, this morning’s geopolitical concerns have helped push bonds above this critical level once more. Bonds are trading in a tight channel. We will maintain our locking bias.

Stocks are again climbing higher this morning as China’s Xi makes statements that defuse the ongoing trade war rhetoric. This time, he is committing to reduce existing tariffs on automobiles. Further, he is pledging to remove financial restrictions on banking and other industries in hopes of lessening the potential of a trade war between China and the US. He went so far as to compare the recent path of trade disputes to Cold War mentality.

 

Stock investors are hoping this is now an opportunity for the two sides to forge a path towards mutual trust. However, many economists warn that this could amount to just words from the leader of China, and that actions will need to quickly follow. As we have found in recent weeks, this issue has bounced back and forth as news continues to develop. Stocks could find themselves slumping once again in the days to come as developments arise. It will be an ongoing issue at least for the short term.

 

After a brief stint above their 50 day moving average, mortgage bonds are currently beneath this critical level once more. Bonds have been in a range trapped between their 25 DMA as a floor and their 50 DMA as a ceiling. As the days move on, this range has tightened and is now nearing the stage where bonds will be forced to make a decision as to which direction they will head. Since we know they are getting squeezed out to one direction or the other, we look for clues as to which is more likely. With stocks climbing sharply higher, that will add downward pressure to the bond market. Further, after the close of the markets today, bonds will experience a coupon roll-over. This is where prices are adjusted to reflect the maturing coupons. This event happens one day each month. Although it doesn’t impact our mortgage interest rate sheets, it certainly does impact the technical picture. This alone will be enough to push bonds below this support level, forcing them to have to contend with the 25 DMA as a ceiling of resistance once again. This was a difficult ceiling to break the first time, so this isn’t good news for the near term direction of mortgage interest rates.

 

Given the continued negative technical picture, we will maintain our locking bias.

Mortgage bonds once again failed to break above the top of their trading range, so now we can expect them to fall down to the bottom.  We had a similar situation in the stock market.  However, that was in reverse.  Stocks on Friday fell down to their 200 day moving average and once again bounced higher off this critical level.  Stocks have tested this no less than 7 times in the most recent three weeks, with each time leading to a nice run higher.  As expected, stocks are now well ahead for the day, with the Dow up over 300 points in early market trading.

 

The Whitehouse has seemed to soften their stance regarding tariffs at the moment, as China threatened to devalue their YAUN.  This is a smart move by China, as it would essentially reduce the cost of American’s buying Chinese products as a way of whipping out the impact of tariffs.  A lower currency rate in China would hurt the US far more than any benefit the tariffs will bring.  Would the US then be forced to devalue the dollar to compete?  This does not seem to me to be a game we should be playing.

 

With bonds still unable to muster the strength to break above the ceiling of resistance, we will maintain our locking bias.