Mortgage bonds suffered losses again yesterday, in spite of dovish Fed Meeting Minutes and a strong 30 year bond auction. Investors had all the reasons they needed to push bond prices higher, however they became enticed by strength in the stock market. Since both markets compete for investment dollars, the bond market typically loses when higher returns can be made in the stock market. Also adding to the headwind, oil prices rallied higher and exceeded the psychological $50 per barrel price.
Bonds are now nearing a very important level of support at their 200 day moving average. With the market not able to hold on to gains even when getting bond friendly news, they clearly lack conviction and are subject to further declines. If the 200 day moving average fails to hold bonds, we can count on bonds losing a fair amount of ground quickly. This would put upward pressure on mortgage interest rates and could end the hope of lower rates in the near future. A continued stock market recovery certainly isn’t helping the cause. At this point, stocks seem poised to continue to run higher.
With bonds under significant pressure, combined with the risk of falling beneath the 200 DMA, the safe play will be to lock.