The recent rally in mortgage bonds has stalled as the 10 Year Treasury Note yield failed to improve below the 2.31% mark we identified in yesterday’s update. Since that has been a formidable level since late November of 2016, it’s unlikely that we will see rates fall beneath this level without a significant catalyst. Given that tomorrow starts the Employment reports with the release of ADP’s March job gains, markets will not be willing to make significant bets ahead of this important release. Combined with the release of the Federal Reserve Meeting Minutes, volatility is likely to increase.
Each of the times bonds have reached these levels in recent months, a sharp sell-off in the market immediately followed. The GOP has signaled that they may try to push their repeal of Obamacare once more within the next week. Since the last attempt’s failure was a primary driver of stocks selling off and money flowing into the bond market, I anticipate that we will see a significant sell off in the bond market if they are successful this time around. That would drive mortgage rates back up to where they were in early to mid-March and beyond. Passing the repeal of Obamacare would greatly increase the chance of passing corporate tax reform, which will again be a primary driver of increasing mortgage rates. These are all important changes that will impact the future of interest rates.
Given the unlikelihood of the 10 YTN dropping in yield, we will maintain our locking bias.