Bonds Hoping to Break Out

Mortgage bonds are currently at the top of a trading channel, attempting to make a break above their 25 day moving average.  The 10 Year Treasury Note has been in a similar situation and has actually broken above its 25 DMA.  This is a significant battle that could lead to better interest rates in the near term if bonds are able to win this fight.  Bonds have not been convincingly above this critical moving average since early September of 2017.  So a victory above this would be considered a much needed break out.  However, since breakouts are the exception and not the rule, there remains great risk that bonds will be pushed lower.  Let’s hope this long over-due move happens.

Retail Sales for the month of February were released this morning.  Surprisingly, they fell 0.1%, which is well off of the 0.4% increase that was expected.  The Controlled Group, which strips out autos, building materials and gas, grew by 0.3%, which was also short of expectations of 0.4%.  With Retail Sales being a primary driver of economic activity, it was a bit of a shock to see this number fall.  Given that many are now experiencing the larger net paychecks that resulted from the tax reform, many economists anticipated consumers to step up their large ticket purchases.  From what we see here, that hasn’t been the case.

Until mortgage bonds have convincingly broken above their 25 day moving average, we will maintain our locking bias.