A Housing Slow Down Coming?

Mortgage bonds continue to trade in a tight range again this morning, as the US stock market is recovering its losses from yesterday’s tariff panic.  Investors are praising President Trump’s tactics, as China now appears to have a reconciliatory tone after the recent escalation in the trade war rhetoric.  Hopefully, we will see China submit and agree to the terms the US has laid out for trade.  If so, we could possibly avoid an all-out trade war.  However, this issue is on going and seems to change tones from day to day.  We’ll have to see what the weeks ahead have in store before a celebration is in order.

Once again, the signs of a recession brewing are shining bright.  The spread between long term rates and short term rates inched closer, and now sits at just 27 basis points.  It seems the Fed is set to continue the path of higher rates, which will pressure yields on the 2 year notes even closer to those offered on a 10 year note.  This is one of the strongest indicators of a recession.  With the Fed continuing to tighten monetary policy, restraining cash flow is likely to cause a major slowdown.  It seems to me this will correspond to a correction in the housing market.  I see this happening in 2020 or before.

Given the continued weakness in the bond market, we will maintain a locking bias.