Mortgage Mike’s Daily Rate Commentary

The battle over the 200-day moving average was lost this morning, as mortgage bonds fell to the pressure of the strongest stock market in US history. History shows that after a move beneath this critical level, bonds tend to fall sharply in the days immediately following the move. This is heavily due to triggered selling where investors choose a point at which their bond holdings are automatically sold off once a preset level has been crossed. This “trigger selling” momentum is causing money to flow out of mortgage bonds and into the stock market. From a technical picture, this is not welcomed news for mortgage interest rates, which are now climbing higher.


According to a Bloomberg survey of fund managers and strategists, the second longest bull market in US history will be over by the end of 2018. The median answer to when we will see the next recession was in the first half of 2019. There is little question that the stock market run has been driven by a liquidity-filled economic environment that is now on its final leg. By mid-2018, the Fed’s balance sheet reduction should be well underway. This will undoubtedly cause downward pressure in an irrationally exuberant stock market which has become so complacent that it virtually ignores the typical threats that should be driving prices lower already. Once investors feel the pressure of the Fed allowing assets to run off their books, we could see widespread panic selling of stocks that will further cause our economy to slow.


With bonds once again below their 200 DMA, the safe play will be to have a locking bias.

Stocks are pointed lower in premarket trading while mortgage bonds continue to make small gains within a steep upward price channel. So far, mortgage bonds have remained above the multi-layer support that is critical for bonds to see rates continue to improve. However, it’s important to once again point out that mortgage bonds haven’t been able to maintain a position above their 200-day moving average since before the presidential election in November. Therefore, we remain at great risk of experiencing a pullback from current levels.


Today is a slow economic news reporting day, so markets will trade heavily based on the technical picture, which is so far looking good for the bond market.  Next week will bring some important news updates, highlighted by a Fed meeting and interest rate announcement. We don’t anticipate the Fed to raise rates now, nor do we expect an announcement of “Quantitative Tightening.”  It will likely be the September meeting before the Fed announces the start of the pull back.


If bonds remain above the multi-layered support, we will maintain a floating bias. However, if bond prices weaken, be prepared to lock.

Mortgage bonds are showing strength, and are now above the significant ceiling of resistance. Although this move could prove to be just temporary, it is a positive sign for the near-term direction of mortgage interest rates. Since early last November, bonds have not been able to sustain a move above their 200-day moving average for very long. Since history tends to repeat itself, we will likely see bonds break back below this level at some point in the near term. However, if they can hold above this critical level, we could see a significant improvement to mortgage interest rates as there is plenty of room for bond prices to improve. Let’s hope for the best!


The showdown over the US debt ceiling is looming, as our leaders only have until October to agree upon a new allowable debt level before the government once again faces a shut down. If the Treasury runs out of money, the US credit rating will again be threatened. This would effectively raise borrowing costs for our government as people would no longer consider the US government as safe an investment as it has always proven to be.  That would also drive interest rates higher on mortgage bonds, as higher rates would need to be offered to attract sufficient capital to compete with the coming higher yields offered on 10 Year Treasury Notes.


With mortgage bonds currently improving, we suggest waiting to lock for those who can closely watch the markets. If you can’t maintain a watchful eye on mortgage bonds, now is a great time to lock.

A defiant President Trump came out and said his plan is to let the healthcare reform bill die.  The repeal and replace Obamacare plan desired by the President proved too big a pill for many Republican senators to swallow.  Therefore, President Trump plans to let the current system “fail” and then let the ones who didn’t support the new plan “suffer the consequences.”  Although this news should have given stock investors reason to pull back, stocks are right now at new all-time highs. This is a bit irrational, as much of the recent gains were made based on the hopes of this bill as well as a tax bill passing.  With healthcare reform no longer on the table (at least for now), the tax bill has little hope of passing as well. 


Although mortgage bonds remain in an upward channel, they have yet to been able to muster the strength to break through the multi-layered ceiling of resistance that includes the 200, 50 and 25 day moving averages.  Although a break-through is possible, it is not entirely likely to happen.  Anytime we are talking about a move above or below the 200 DMA, we must consider the significance of such a move.  Since it generally indicates a trend reversal, such a move is not likely to happen without a significant economic event stimulating the move.  With stock prices at all-time high levels, bonds will have a difficult time exceeding current levels. 


Unless mortgage bonds can make a clear break above the current ceiling, we will maintain our locking bias. 


President Trump’s agenda suffered another blow last night when two Republican senators announced they will not support the revised proposed plan to repeal and replace Obamacare.  One of the two happens to be Utah’s Senator Mike Lee who feels the plan does not go far enough from separating the US government from the obligations of providing healthcare to Americans. With this loss, Republicans lack the votes needed to pass their plan. Although the battle could be attempted at some point soon, it appears to be dead for now. Since this was a significant driver of higher stock prices post-election, this could slow the pace of stock growth in the near term. That’s great news for the bond market, which could not have the strength needed to make a decisive break above its 200-day moving average.


A look at the bond charts show what is called a “golden Cross.”  This is where the 50-day moving average crosses over the 200 DMA. It’s typically a bullish indicator which could point to an improved bond market ahead. Given the timing of the healthcare reform debacle, this may add the steam needed for bond prices to move higher. We will have to wait and see.


The failure of passing healthcare reform once again puts Trump’s overall fiscal policy changes in jeopardy. With the proposed tax reform bill heavily tied into the successful passing of the healthcare reform plan, we could see current tax rates stay in place. Once again, this should drive stock prices lower and help soften mortgage interest rates.


With mortgage bonds improving, you can float if you are able to closely watch the markets. If bonds make a strong break above their 200-day moving average, we will see improved pricing. However, given the difficulty associated with making such a move, we will likely see bond prices weaken. Therefore, if you can’t watch the markets, the safe play will be to lock.

Although many Americans are feeling good about the future of the US economy, it seems there are many dark clouds still dampening the outlook. For one, the US economy is not performing as strong as most economists anticipated it would.  Although consumer confidence shot to all time high levels following President Trump’s victory, it seems that many have soured towards the hopes that his addenda can be executed. From healthcare to tax reform, the battle has so far not been easy for the Republicans who currently have control in the House and the Senate. They also have not been able to pass most of their planned objectives. We should learn soon how the CBO feels about the revised healthcare plan. Republicans are bracing for the report, hoping it looks good enough to convince their opponents that it’s a good plan for America. We will have to wait and see. 


Today is a relatively quiet news day, so the technical picture will greatly dictate the direction of mortgage rates today.  With the stock market now at new all-time high levels, bonds may have a difficult time making any significant ground today.  Bond prices currently remain trapped between their 100-day moving average below and their 25, 50 and 200 day moving averages. Unless we experience an event significant enough to push bonds through the multiple layered ceiling above, we will likely remain stuck in the current channel. 

For the time being, we will maintain our locking bias. 


Investors entered the market with a show of strength this morning, driving stocks to set net all-time high records while also pushing bond prices higher. The strong opening was primarily driven by reports of lower inflation via the Consumer Price Index (CPI). It was reported that although inflation for the month of June was unchanged, the year over year Headline number dropped from 1.9% down to 1.6%. Considering that this was at 2.7% just a short time ago, the direction of inflation is clearly on a downward path. This has been the Fed’s fear as they drove interest rates higher, and may cause reason for the Fed to hold off in the near-term on making additional increases to the Fed Funds Rate.


Yesterday, Fed President Janet Yellen made a disturbing comment regarding the reduction of the Fed’s balance sheet. She said that although they plan to maintain a higher amount of investments than before the markets crashed in 2008, they only intend to hold 10 Year Treasury Notes. This means that all the mortgage backed securities they now hold are planned to eventually either fall off their balance sheet as loans are paid back through homes selling or being refinanced, or they will eventually be sold off in the open market. This translates to higher mortgage interest rates in the future. However, it could take years for the full impact to be felt. In the meantime, we will continue to enjoy the low rate environment while it lasts.


Mortgage bonds are now trading in a wide channel. With prices well off their highs of the day, we will maintain our locking bias.

The stock market is climbing today, once again nearing all-time high levels.  The S&P 500 is currently at 2447, which is only a few ticks away from the 2450 level we identified at the beginning of this year as the market high target for 2017.  Although this may ultimately prove to be significantly under-estimated, there remains a strong case for stocks to experience a pull-back as the Fed looks to tighten their economic stimulus by reducing its balance sheet.  Although Fed rate hikes did little to deter stock investors from pushing stock prices higher, “Quantitative Tightening” could prove to have the opposite impact to stocks as “Quantitative Easing.” 


In her continued testimony to the Senate, Fed President Janet Yellen continued her discussion about the lack of inflation in the market.  Interestingly, she mentioned that the increase in opioids has contributed to the lower labor force participation rate.  She further discussed the Fed’s plan to reduce the Fed’s balance sheet.  Given that they will not be “selling” any securities, this is not as aggressive of a plan as many originally anticipated.  The goal is that there is as minimal disruption to the financial markets as possible.  Over the “many” years it will take to achieve their overall goal, she anticipates that it will drive longer term interest rates higher. 


Mortgage bonds once again find themselves battling the 100-day moving average.  Given the current weakness in the bond market, this could be a battle that bonds ultimately lose.  As we wait and see how this turns out, we will maintain our locking bias. 



The stock market hit an intra-day all-time high in early morning trading.  The market was driven higher by words spoken by Fed President Janet Yellen that indicated we may see the Fed slow down their path of rate hikes and shift their focus to reducing the balance sheet.  We feel the Fed could be done with rate hikes this year or possibly sneak one more in, and then they will hold off on future rate hikes to focus on the balance sheet.  The reduction of the Fed’s balance sheet, which will likely be branded as, “Quantitative Tightening,” will certainly impact mortgage interest rates.  As the Fed reduces their purchases of US Treasuries and mortgage backed securities, there will be added downward pressure to both investments, which translates to higher interest rates. 


Janet Yellen’s statements relating to the economy were focused on inflation and the labor market.  Since the reduction in inflation levels has been heavily tied to low oil prices, the Fed feels that this trend will reverse soon and that we will see inflation rates move higher.  She also feels that with the tight labor market, it has been difficult for businesses to grow due to the challenges of not finding qualified workers.  If we can find a way to move some of the population who is currently living off government entitlements into the labor force, this pressure will reduce and we could see our job market make more significant gains. 


In an unlikely fashion, mortgage bonds are improving with the stock market.  Mortgage bonds were able to move above their 100-day moving average, however, there is a bond auction today at 11:00 am MST that could change things.  If you can’t watch the markets closely, we will maintain our locking bias.  If you are, you can carefully float as see if the auction helps drive bond prices higher.  If we see markets turn negative, lock. 


Bonds are still showing a lack of strength today after making a failed attempt yesterday to challenge their 100-day moving average.  Further, stocks have also failed to make any significant gains in recent trading days. This is indicative of a market where investors are converting some of their holdings into cash. Many see stocks as vulnerable to a short-term correction while also fearing interest rates moving higher as the Fed looks to reduce its balance sheet. This will lead investors to carry a higher ratio of cash within their portfolios. My guess is that is what we are seeing now.


Today is another quiet economic news day. However, economic reports heat up as the week moves on. Given the lack of news, bonds will trade heavily based on the technical picture. Given the trend of recent weak performance, this could set us up for another unwanted step up in mortgage interest rates. With bonds at a critical level, now is a time to be cautious.


The unwinding of the Fed’s balance sheet will be an unprecedented event that could prove more disruptive than many believe. Given that the Fed has never had a balance sheet even close to as inflated as it now is, the reversal of Quantitative Easing could cause interest rates to rise higher than expected and the stock market to fall greater than many would believe likely. Unfortunately, it’s a challenge that will be faced in the coming months. This also creates a strong argument for carrying a higher ratio of cash in your investment portfolio.


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