Shockingly, mortgage bonds are improving in early market trading this morning. The longevity of this rally makes me nervous as we would typically see a short-term correction in this long of a rally. Since mortgage interest rates never move in a straight line, we expect to see more volatility than we have experienced, especially in a time when the stock market has also been moving higher. And as you can see by looking at the stock market, although the trend has been upward, it certainly hasn’t moved in a straight line. I would have expected the bond market rally to somewhat mirror or match the stock market rally.
More clear signs of a global slowdown are apparent with the 10-Year German Bund (Germany’s equivalent to the U.S. 10-Year Treasury Note) now paying a negative rate of return. In other words, an investor must PAY to invest. As ludacris as that sounds, this is like the environment we had during the Great Recession. This is clearly pushing money into the U.S. 10 Year Treasury Note. Even after the exchange rate, it is paying a greater return than a German investor would make by investing in their own government. This has driven the U.S. 10-Year Treasury Note yield down to 2.37%, which is lower than most every economist would have guessed.
If you haven’t yet locked a rate, I’m getting really nervous at current bond price levels. I feel a pullback coming soon. Float only if you are closely watching the markets.