Another Recession Indicator

After falling beneath their 50 day moving average yesterday, mortgage bonds are recovering some of their losses so far this morning.  However, they are now contending with the 50 DMA as a ceiling of resistance which could prove to be a formidable barrier for now.  If this is true, we can expect to see pricing deteriorate as the day wears on.

Yesterday’s update talked about the low level of the current Unemployment Rate predicting a potential recession within a year or two, today we took a step closer to predicting a recession via a second indicator.  A long known indicator of a pending recession in the spread between long term interest rates and short term rates.  Just today, the spread between 10 Year Treasury Note yield and the 2 Year Treasury Note yield reached an 11 year low.  The current spread is just 42 basis points between the two.  A recession is nearly a sure thing when this figure drops to 0 or becomes negative.  With a Fed rate hike coming in the next week, this will increase short term rates and could further narrow the spread.

Given the ceiling of resistance provided by the 50 day moving average, we will maintain our locking bias.