25 Aug Locking bias
After suffering significant losses the past few days, the US stock market came roaring back this morning. Mortgage bonds were unable to stay above their 200 day moving average and are now at risk of suffering further damage as the stock market regains its footing. The stock market is celebrating China’s move to cut their key interest rates in an attempt to stabilize their markets. This seems to be working so far. However, now that the stock market has shown the ability to drop to the low point it set yesterday, it will be susceptible to repeating the move lower again in the near future. With the Fed possibly raising rates soon, that could trigger another pull back in the stock market. Not only that, but global economic conditions are far from stable. That factor could set off a market drop at some point in the future once more.
Mortgage bonds are back trading within the same sideways channel they have become accustomed to. Given the massive drop in the US stock market, it is surprising that bonds have not found a way to break out of the channel. This is sign of weakness and does not bode well for the bond market. The 10 Year Treasury Note yield is still beneath its 200 DMA, which should help keep mortgage bonds from losing too much value. However, the 10 Year Note yield is up to 2.1%, which is a gain of .1% since the close of business yesterday. Further, it is nearing its 200 DMA. Hopefully it will be able to maintain beneath this critical level.
With bonds suffering losses this morning, the safe play is to maintain a locking bias. The 200 DMA has proven to be a formidable level to cross. Hopefully bonds will be able to make another run in the near future.