Locking Bias

Mortgage bonds are flat so far this morning.  More importantly, the S&P 500 is currently sitting at 1855, which is a new all-time high.  Interestingly enough, the charts are still bullish for stocks, indicating that they may continue to move higher.

We must consider that the last time the S&P set a record, the 10 Year Treasury Note was at about 3%, but today it is hovering right close to 2.75%.  Why aren’t rates higher with the stock market setting new records?  Historically speaking, the bond market is a better reflection of current economic conditions than the stock market.  While the stock market sees a future of rainbows and roses, the bond market is not so easily convinced.  It will be interesting to watch how this plays out.  However, my money would be on the side of the more pessimistic view.  Although still not alarmingly low, economic progress appears to be slowing.  This isn’t to say that rates will stay here.  In fact, we do see rates moving higher.

We are expecting a lot of volatility this week between bond auctions, housing reports and a seemingly non-stoppable stock market.  Also, mortgage bonds are currently being squeezed between the 200 day moving average and the 38.2% Fibonacci Retracement Levels.  While we don’t expect the housing data to be strong, the path of least resistance will be for the bond market to weaken and rates to move higher.

Given the validity and headwind of a strong stock market, we are going to maintain a locking stance.  Should the stock market lose steam, mortgage bonds should benefit.  However, if the stock market continues its path higher, rates will likely step higher.  Stay on guard and watch closely, as the excitement will likely increase as this plays out.


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