10 year note has broken below support/awaiting Fed announcement

Mortgage bonds moved above the 200 day moving average this morning, after a seemingly uninspiring State of the Union Address and fears of instability in Turkey sparked a market rally.  The Turkish Central Bank significantly hiked interest rates from 7.75% to 12% last night in an attempt to fight off raising inflation and a sinking currency.  With world markets being closely integrated, this has helped to boost up safer investments such as mortgage bonds.

In last night’s State of the Union Address, President Obama threatened to carry out his agenda even without Congressional support.  His plan is to do this through Executive orders.  Although it is yet to be decided if this is possible, it is raising concerns in the market, leading to stocks moving lower once again.  As we have said lately, should the stock market continue to fall, mortgage bonds will likely be the beneficiaries.

The Federal Reserve Open Market Committee meeting ends today, with the announcement coming at 2:00 p.m. Eastern time.  There is a 0% chance of a change to interest rates, and the likelihood is that the Fed will continue its taper plan by reducing another $10 billion per month in asset purchases.  If the past repeats itself, mortgage rates may actually improve.  In fact, from a technical perspective, mortgage bonds are set for continued improvement.  This is further supported by the 10 year note, which has broken below support, giving yields the potential opportunity to drop another 20 basis points.  We will suggest carefully floating into the statement.  However, be on guard at 12:00 pm MST.  Should the market not react as hoped to the Fed announcement we will quickly change to a locking bias.