10 Jul Locking bias
Mortgage bonds have fallen sharply in trading yesterday as well as today. Once again, the financial crisis in Greece is the primary driver. The leaders in Greece came up with a proposal that closely mirrors the one their creditors presented to them in late June that their Finance Minister in turn referred to as “terrorism.” It seems that their plan to try to scare their creditors into softening the impact on higher taxes, lower spending and a later retirement age didn’t work out as they had hoped. The next step is a Greek vote in Parliament and then confirmation that the creditors will approve the deal and move forward. It is now likely that a deal will be negotiated that will “kick the can” further down the road. The markets are pricing this in which is resulting in stocks heading significantly higher and mortgage rate pricing moving higher.
Mortgage bonds opened the day beneath their 25 Day Moving Average and are now back to the wide sideways channel they were trapped in for weeks. The 10 Year Treasury Note yield has also moved significantly higher and broke through multiple layers of resistance. Overall, this is a very negative move for mortgage rates, and one that could continue to worsen if the global financial issues continue to improve. However, if the proposed deal in Greece falls apart once again, this could help spur another bond rally. This would improve mortgage rates and hurt the US stock market. It is a situation that is changing frequently. Volatility will continue to be high until the global economies stabilize.
Given the state of the markets, there continues to be a high level of risk associated with floating. Therefore, we will maintain our locking bias.