Continuing with a locking bias

Mortgage bonds were forced well below the 200 day moving average yesterday, as the battle for improving interest rates suffered a setback.  However, not all hope is lost, as today bonds have battled back and are now not too far below the 200 DMA.  Although they were down in early trading this morning, they jumped back after Durable Goods were reported this morning showing they were down 4.3% month over month.  This is a significant move lower, and much lower than the 1.6% increase expected.

The Case Shiller Home Price Index for November was reported this morning with a 13.7% year over year gain.  This strong report is encouraging, but not expected to continue.  As we look deeper, there are reasons for concern in the housing market.  The gains were in early months, with November actually showing a decline.  When you consider seasonality of the report, the housing market is likely still healthy, just improving at a slower pace.  The market became so used to declining housing values, that even single digit gains are to be celebrated.

Mortgage bonds have always had a difficult time making a break above the 200 DMA.  Since we are now sitting just below this critical level, there is a likelihood that bonds will be forced lower as they try to break above this level.  It seems unlikely for traders to take too much risk ahead of tomorrow’s FOMC meeting.  We will suggest a locking bias today.  However, stay tuned, as we anticipate the remaining days of this week to be market moving.  Let’s just hope the movement is positive formortgage rates.