10 Jun High risk in floating
As anticipated in yesterday’s update, mortgage bonds broke beneath a significant level of support right before the market closed yesterday. There
was follow through selling that occurred right at the opening of the market this morning. At this point, in just over seven full trading days,
mortgage bonds have lost in excess of 200 basis points. Bonds are still in a deep downward trading channel, with no clear bottom in sight.
The reality is, by the looks of the charts, the losses will likely continue. There is very little support in place to catch the 10 year treasury
yield from moving from its current level of 2.42% up to the next clear resistance point at 2.65%. This will certainly take a toll on mortgage
interest rates, making another ¼% increase a likely scenario.
At this point, news reports are almost irrelevant. The bond market is falling on both good news and bad. There is a great deal of emotional
fear-based trading all related to the pending actions of the Federal Reserve. The anticipation of when the Fed will hike rates, as well as the
unknown impact to the bond market is causing investors to get out of bonds to avoid continued losses. We believe that what the market needs is
for the Fed to increase short term interest rates. This will be a deflationary move and will provide a headwind for the US economy. That
would actually be healthy for the long term bond market, such and mortgage backed securities. Long term rates are established by the market and
not set by the Fed. It would also remove the fear of when short term rates will move higher from bond holders. A September move is now
widely anticipated by the Fed. Although the timing is not good for the Fed to make the move, hopefully they will.
There is a great deal of risk in floating right now. We will maintain our locking bias.