03 Apr Locking Bias
Mortgage bonds opened above their 100-day moving average, which is an accomplishment when you consider that the last time they were above this trend line was in early October of 2016. Of course, this trend line is now significantly lower than it was back in October, but it still represents an accomplishment worthy of celebration. The key that will decide if rates will continue to improve will be the performance of the 10 Year Treasury Note. The yield is currently 2.36% on the 10 YTN, which is only 5 basis points higher than the 2.31% low that has not been broken since mid-November of last year. If yields can break below this level, we will see rates fall further shortly after.
This week is filled with important economic news, highlighted by Jobs reports by both the Bureau of Labor Statistics (BLS) and ADP, as well as planned speeches by multiple members of the Federal Reserve. The key question will be talk about reducing the Fed’s balance sheet, which is currently at the $4 trillion mark. Of this insanely high number, approximately $1.7 trillion are invested in mortgage backed securities. If the Fed decides to begin to sell off some of their holdings, this will cause mortgage interest rates to immediately spike higher. It would essentially be unwinding the massive Quantitative Easing that drove mortgage rates lower in recent years.
Now that the hurdle of the 100 DMA has been accomplished, we will wait to see if the 10 YTN yield can fall below the 2.31% level. In the meantime, we feel that locking is the safe play.