Mortgage bonds fell dramatically yesterday, pushing mortgage rates up about 1/8% across the board in just under 24 hours. This move was driven primarily by the news out of Europe that a potential deal is likely to be finalized to keep Greece from being forced to exit the Euro. If they are pushed out, this would essentially wipe clean their debt and cause many investors to lose what is now owed to them. Of course, no one wants to lose money. Therefore, a deal seems likely here in the short term. The key sticking points are that a deal would require the retirement age to be pushed back, as well as tax increases. The socialist party will have a hard time accepting some of what will be required. However, even if a deal is agreed upon, this would only serve to push the true problem out into the future. The issues in Greece are far from being resolved, regardless of the outcome this week.
Bonds and stocks are both trading heavily based on the technical picture. While many stock indexes are trading near record highs, bonds have been riding down a very strong channel. It may take a pullback in the stock market to give bonds the strength to make a break out of the channel. However, there is no indication that the stock market is ready to slow down this pace of increase. While stocks are already near the high levels many large financial institutions predicted they would cap out at in 2015, they appear poised to continue past current levels. This creates a further headwind for the bond market, as each market is competing for the same investment dollars. At this point, we are hoping for a Fed rate hike to help stabilize the markets. Although counter intuitive, that could be the medicine bonds need to increase strength and stop the painful hike we have seen in mortgage interest rates.
With bonds still riding the downward channel, we will maintain our locking bias. Watch the yield on the 10 Year Treasury Note. It currently sits at 2.39%. However, based on the technical picture, it has a clear path up to the 2.5% mark before it has any overhead resistance. This would further pressure mortgage rates higher.