Mortgage bonds remain within striking distance of reaching multi year lows. Further, the 10 Year Treasury Note yield is flirting with the 1.7% level, which is a key level that if broken, could help mortgage bonds push higher and drive mortgage interest rates lower. However, the 10 YTN is in a challenging spot as a result. On one hand, there is great risk that the yield could bounce off this critical floor and take mortgage rates higher with it. But on the other hand, a break lower is also a possibility. Since break-outs are difficult to predict, we must be careful at this point. The risk equation of locking in at current low levels vs floating in hopes of a break lower comes down to tolerance and the ability to closely watch the market. If you aren’t able to watch closely, now presents an incredible opportunity to secure an amazingly low rate.
The US stock market is driving higher, which should be creating a headwind for mortgage bonds. However, both markets are starting the day to the upside. Stocks broke above a critical level and now have some freedom to climb. The renewed strength in the stock market is greatly contributed to Friday’s Bureau of Labor Statistics Jobs Report adding doubts to the Federal Reserve’s hope to raise the Fed Funds rate sometime soon. The Fed may not want to have a rate hike while jobs are diminishing as their legacy. If a rate hike were to push the US economy closer to recession, many would blame the Fed. That certainly isn’t something the Fed wants to contend with.
With bonds still underneath a critical ceiling, the safe play will be to maintain a locking bias. If you choose to float, watch the markets closely.