Yesterday’s move by the European Central Bank to increase their Quantitative Easing by an additional $20 billion per month and also lower their benchmark interest rate has stock markets around the globe celebrating this morning. Since Europe has moved to a negative interest rate policy, people who invest in their government bonds are actually losing money. In essence, the government is charging people to park their funds with the European Central Bank. This is clearly not a wise investment strategy for many potential investors who have global markets competing for their money. The US stock market seems to be picking up a nice share of the funds, which is pushing US stock prices higher.
Mortgage bonds continue to take a beating this morning, pressuring the cost of mortgage loans higher. Bond prices are now sitting directly on the 50% Fibonacci line, meaning that bonds have now given up 50% of the gains they made since pricing started to improve at the beginning of the year. A drop to this level would have been predicted by those who trade based on Fibonacci principals. If the market was in a position to bounce off this support, we would likely see a nice rally in mortgage bonds. However, the momentum seems so strong that it will likely continue to deteriorate and pressure interest rates even higher.
This is a very dangerous moment for the near term direction of interest rates. The safe play will be to maintain our locking bias.