13 Sep Locking bias
Now that mortgage bonds have broken beneath the channel that has held mortgage rates from rising for the past few weeks, bonds are heading down towards their 100 day moving average. Based on the strength of support just beneath current levels, we are hopeful that the losing streak in the bond market will soon come to an end. We are hoping for a bounce off the 100 DMA. However, if that doesn’t happen, and bonds continue to fall beneath this level, mortgage rates will be in trouble.
Yesterday’s 10-year Treasury Note Auction was weak. The Bid-to-Cover ratio was shockingly low, coming in at the lowest we have seen in 7.5 years. A low level of foreign demand was partially to blame for the lack of investor participation. With global yields climbing higher the past few days, this may be a contributing factor. Not because investors are excited about now receiving a 0% rate of return, as several competing products across the globe are now paying, it’s because investors now see an opportunity for yields in foreign investments to drop back down, creating an opportunity for price appreciation.
There remains great risk to mortgage rates in the near term. Therefore, we will maintain our locking bias.