Locking bias

Mortgage bonds are currently battling an overhead ceiling of resistance, as they fight to stay within the upward channel in which they have been trading.  Bonds are getting support from the stock market, which is again pointed lower in pre-market trading.  If stocks struggle again today, we could see bonds muster the strength to make a break higher.  This would be an exceptional accomplishment, as breakouts are difficult and don’t typically happen.  It would be more likely to see bonds hit the ceiling and be pushed lower.  If they do move higher, there is a second ceiling provided by the 50-day moving average just above.  Therefore, it would require great strength to see mortgage rates improve from current levels in the near future. 

Bill Gross from Janice Capital Management, a prominent bond manager, stated on Bloomberg Television that the $13.9 trillion Treasury Market is at an “inflection point” and close to breaking a three-decade trend of falling interest rates.  This frightening comment echoes those of other bond fund managers who feel that the recent three-week improvement in mortgage interest rates is just a short term move that will be over in the near term.  As we near recovering 50% of the losses in the bond market since the post-election rate increase, Fibonacci logic tells us that bond prices will likely be forced lower very soon, bringing to end the nice improvement in rates we have enjoyed the past three weeks or so.

With bond prices facing a duel layer ceiling of resistance, we will now switch to a locking bias.  Even if bonds can muster the strength to break through each of the two levels, they will soon face the 50% Fibonacci ceiling not too far above current levels.  Bond investors watch such levels closely and generally know at what point they should sell.  That will certainly be a point where many choose to cash in their holdings.