Mortgage bonds took it on the chin in late trading yesterday, breaking beneath the 25 day moving average and quickly dropping down to their 50 DMA. The break lower was heavily influenced by the CPI report showing consumer inflation stronger than anticipated. Further, bonds had made many unsuccessful attempts to break higher. Each time this happens, it is like adding moisture to a paper towel that is holding a weight. Eventually, the paper towel will fail and the weight will crash through. Rates have been at or near 3 year lows for weeks and have not been able to improve further. This presented a great opportunity to lock in a rate. Although they may get back to where they were, for now the cost of a mortgage is a little higher than it was.
The Fed Minutes from April’s FOMC meeting are scheduled for release at noon MST. Generally speaking, days when Fed minutes are released are not favorable for the bond market. This is certainly true so far today. Bonds are continuing their losses and are now beneath their 50 day moving average. With the 100 DMA still a ways beneath current levels, it looks likely that pricing could get worse before bonds are able to find stability. If the Fed comments prove to be bullish, bonds will drop quickly. Therefore, we should prepare for continued volatility today.
With bonds continuing to build a downward trading channel, we will maintain our locking bias.