18 May Huge risk in floating
Mortgage bonds retreated this morning, giving up all of the gains from Friday’s nice run higher. Mortgage bonds are now once again challenging their 200
day moving average, which was somewhat anticipated in the market. Friday morning we had a gap-up opening in the market, which means that pricing
began the day higher than the point it was at the close of business the day before. This creates what is typically referred to as a “window.”
Once a window is created, such as the one we had on Friday, pricing often has to go back and “close the window” before the market can make a true run
higher. Since the bottom of the window is right at the 200 day moving average, prices have now officially “closed the window.” As long
as the 200 DMA holds, we should see a bounce higher. However, if the 200 DMA fails to hold, we will fall back to the interest rate highs of 2015
that we saw early last week.
Mortgage bonds face a week of heavy economic data. Therefore, we could be in for a wild ride. Bonds are now trading in a wide range of 51 basis
points. Therefore, we can anticipate heavy swings from the bottom to the top. As the week progresses, it is likely that we will make a
break in one direction or the other. If the break is beneath the 200 day moving average, hold on to your socks, cause the bottom will fall quickly.
If the economic news is friendly to the bond market, we will likely see a break above current overhead resistance. That would give bonds the
opportunity to make a run up towards the 50 and 100 DMA. That would be the ideal scenario for mortgage rates, and would help relieve some of
the pressure from the recent uptick in interest rates.
With bonds remaining just above the 200 day moving average, we will suggest a floating bias. However, if they break beneath support, we will immediately
switch to a locking bias. We will use the “float when at the bottom of a channel and lock when at the top” rule today. If you have a rate
you need to lock and are not constantly watching the bond charts, go ahead and lock. There is great risk in floating without an eye on the market.