Bonds Look to Pull-Back

Mortgage bonds have continued to climb up to their 200-day moving average.  Now is the critical time that will dictate the near term, and potentially longer term, direction of mortgage interest rates.  Although mortgage bonds have toggled above and below their 200 DMA a few times in recent weeks, this level generally indicates the long-term direction of mortgage interest rates.  It seems that bonds are unable to determine which route to take and are waiting for a strong sign before ultimately choosing a direction.  If they can break above this level, we once again have hope for lower rates in the future.  This is an exciting time as we anxiously await the outcome. 

The Consumer Price Index (CPI) dropped from 2.2% down to 2.0% in the month of October.  Although this drop was in line with expectations, it remains above the Fed’s target of 2%.  The Core CPI number, which strips out food and energy costs, came in stronger than expected at 1.8% for the year.  Prior to the release, the market was anticipating the rate to hold steady at 1.7%.  Since this is the less volatile of report, it tends to be what the market focuses on.  Therefore, the headlines are reporting that inflation came in showing strong growth.  This is not a good message for bond holders to hear, as inflation is the arch enemy of mortgage interest rates. 

Given that bonds are now right up against their 200-day moving average, we are expecting a pull-back.  As a result, we will maintain our locking bias.