13 Oct Floating is risky
The mortgage bond market is at a pivotal point right now, sitting right on the 200 day moving average. This is another Moment of Truth, with the near term direction of mortgage interest rates hanging in the balance. If the 200 DMA fails to hold as support, we can anticipate a quick 1/8% – ¼% jump higher in a relatively short period of time. However, if this level does hold we could see bonds build up the strength needed to make another run higher. So far, the 10 Year Treasury Note yield has remained beneath its 200 DMA. That is a positive sign for the mortgage market, which often times moves in sync with its 10 year treasury counterpart. However, things can change quickly. At this point, all we can do is to wait and see what happens.
After being up 9 of the last 10 trading days, stocks are slightly lower this morning. The run higher in stocks has been very impressive, as is evidenced by the sharp upward channel they have been trading in. However, the run higher appears to be stalling, with a rounding top formation beginning to develop on the charts. If the stock market is unable to break above the current level of overhead resistance; that could give mortgage bonds the force they need to hold their ground. However, if the stock market is able to muster the strength to make another run higher, it would likely push bonds back beneath their 200 DMA once more.
With bonds not yet showing a clear direction, there is no way to say for sure which direction they will ultimately choose. Although floating is risky, we do have the 200 DMA to support bonds. If that breaks, lock immediately.