Floating Stance

Mortgage bonds tested the 102.00 level again yesterday, and after briefly breaking below, they were able to rise above and close higher.  This is an important level, and has proven its strength many times in the past two months.  Mortgage interest rates are still about 1/8% higher than they were in late May.  However, it may take weakness in the stock market to push mortgage bonds much higher than they are now.  Given that the stock market has had a run higher than has been ongoing for more than 1,000 days, it seems reasonable that a pull-back will happen at some point in the near future.

This morning’s release of Initial Jobless Claims showed that only 302,000 new unemployment claims were filed last week.  This is a decrease of 3,000 from the week prior, and shows continued improvement in the job market.  However, as summer turns into the colder months of fall and winter, may seasonal jobs that accounted for many of the new hires the past couple months will come to an end.  Further, Microsoft announced a significant layoff of 18,000 employees.  This is the largest cut in Microsoft’s history, and is mainly secluded to their Nokia workforce, which has been unable to gain traction in their fight for market share against Apple.

Weakness in the housing market continues, with Housing Starts for June reportedly down 9.3% at 893k units.  This was lower than estimates of 1.026M.  Also, last month’s number was revised lower from 1.001M to 985K units.  Building Permits for the month of June were also weak, with reports showing that only 963k permits were applied for.  This was below expectations of 1.038M units, and was a 4.2% decrease from last month’s downwardly revised 991k units.

With mortgage bonds in a sideways pattern, being held up by support at the 102.00 level, there is no significant reason to jump to locking.  If the 10 Year Treasury Note yield can break beneath current levels of 2.5%, we will likely see mortgage bonds rally higher.  This would be positive for mortgage rates, and would likely correspond with a temporary pull back in the stock market.  We will wait and see if this plays out.  However, if bonds breach the 102.00 level, we will resume our locking bias.  Watch closely and see how this plays out.