If you float, watch very closely

China’s decision to manipulate their currency is far more significant than many people understand.  By lowering the cost of Chinese goods and services, many US and European companies will suffer.  This will certainly impact GDP here at home and spark continued debate about foreign trade policies.  As the Federal Reserve moves short term interest rates higher, this will further exacerbate the situation and add additional pressure to US company’s bottom lines.  In turn, this will hurt the US stock market, as corporate profits suffer.  That will add additional deflationary pressure to prices here at home, which will put the Fed in a bind.  This is a very good move for the direction of mortgage interest rates. All though it’s too early to say, there is a possibility that at some point in the not so distant future mortgage rates could be back down to the lows of early 2015.

Mortgage bonds continue to flirt with their 200 day moving average.  They are receiving support by the 10 Year Treasury Note Yield which has fallen below its 200 DMA.  As long as the 10 TNY yield remains beneath this critical level, mortgage bonds have a chance to make a break above their 200 DMA as well.  This is a very exciting time for mortgage bonds and today is a very significant day.  If stocks continue to fall, fueled by the move made by China, bonds could continue to be the beneficiary.  The concern is that stocks will regain some of their losses as the day moves on.  That could take the air out of the bond market and the 10 Year Treasury Note.  However, if stock losses continue to mount, we could see a break above the 200 DMA, which would drive mortgage rates lower.

Until bonds are able to make a decisive move above their 200 DMA, we must maintain a locking bias.  If you choose to float, watch the market closely.  If bonds begin to lose steam at these levels, lock quickly.