Bearish Signals for Bonds

As expected, mortgage bonds bounced off the ceiling and have fallen rather dramatically in the two days since.  Some of the levels that have held up lately have now given way, with bonds breaking below without much of a fight.  Most significantly, the 10 Year Treasury Note yield broke above its 200-day moving average.  This move is bearish for mortgage interest rates.  However, mortgage bond prices are still above their 200 DMA, so we may find support at this level.  Regardless, the current technical picture is not looking good for the near-term direction of mortgage interest rates.

The primary driver behind the sell-off in the bond market was the announcement of President Trump’s highly anticipated tax reform plan.  This plan would primarily lower tax rates on corporations and wealthy individuals.  Since this would be a major influx of disposable income into the U.S. economy, bond prices fell as stock prices climbed again to all-time high levels.  Of course, this plan still needs to be fought out in the Congress and Senate.  However, many experts feel it has a good chance of passing.  If an agreement can be made, we will see mortgage interest rates suffer even more as additional cash flows into the stock market.  This will be an exciting process to watch.

With the bond market continuing to sell off, we will maintain our locking bias.