Locking Bias

Mortgage bonds failed to hold their ground yesterday, and were pushed beneath support.  As often happens when trading near the top of a channel, once bonds turned lower, the downward move was sharp.  However, once they hit the next floor of support, they bounced higher and have regained most of their losses of the day.  It is truly amazing how predictable the technical picture of the bond charts can be.  When you understand the signs of movement, and support and resistance, you can often accurately predict outcomes on days where economic news isn’t driving the markets.

After an attempt to move higher yesterday, the stock market is again under pressure, and is currently trading in a sideways channel.  The future direction of stocks is critical to the direction of mortgage bonds.  Now that the stock market is no longer on the upward channel it has been riding, they are more vulnerable to a sharp move lower.  A drop in the stock market would be healthy for the bond market, and would help support lower interest rates in the near future.

CoreLogic reported that home values grew by 1% in the month of June, and are up 7.5% year over year.  Although this is still an impressive number, the increase in the home values chart shows that the trend has been moving lower.  The typical summer hot buying season has shown to be below expectations, which is also in line with the slowing growth in home values.  Hopefully, home values will stabilize somewhere in the 5% growth range.  However, there is often a correction in value that follows a strong run higher.  We must be mindful of this as a possibility when values reach these lofty levels.

With mortgage bonds in a sideways trading pattern beneath a significant level of resistance, we will suggest a locking bias until we near the support below.  If bonds fall to the next floor, they may find stability and strength to bounce higher.  The stock market will heavily influence the direction of mortgage rates, and stocks and bonds both fight for investment dollars.