Keep your eye on the 10 Year

Although volatile yesterday, mortgage bonds managed to stay above support, and are now challenging a significant ceiling of resistance.  The level bonds are now at is one that has been unsuccessfully challenged many times over the past 14 months.  If mortgage bonds manage to make a decisive break above these levels, it would be very favorable for the direction of short term mortgage interest rates.  However, given the past history of how bonds respond to this challenge, chances of making a significant move higher without stocks turning negative are limited.

The Producers Price Index, which measures wholesale inflation, was released this morning.  It came right in line with market expectations at 0.1%, while the Core Rate, which strips out food and energy, was up 0.2%.  The year over year numbers both declined for the second straight month.  Headline PPI fell from 1.9% down to 1.7%, while Core PPI dropped from 1.7% down to 1.6%.  Considering that both were above 2% just two short months ago, this is very positive news for the possibility of continued low mortgage rates in the near term.

The Empire State Manufactures Survey fell to 14.7 in August.  After hitting a four year record high of 25.6 in July, this is a significant cool down, and a possible future indicator of near term economic activity.  However, a reading above 0 indicates expansion.  Therefore, it isn’t that the current reading is negative, it is just below recent reported figures.

The technical picture for bonds is looking great.  The 10 year treasury note chart is looking very positive as well.  The current yield is below where it has been in more than a year.  There is a strong chance that the downward pressure in yields will help keep mortgage rates low.  There is great risk in floating, so we are going to maintain a locking bias until a decisive move at current levels is maintained.  If you choose to float, watch the markets closely, as things can change without notice.