Mortgage bonds are once again trying to make a break above the critical ceiling that has been in place for more than three years. Since bonds have had many failed attempts to pass this level in recent years, we must consider that breakouts are exceptions and should not be expected. In the current case, however, there are several factors that could help make a break out possible. For one, we have the Federal Reserve interest rate decision due out on Wednesday. As we have said in the past, there is virtually no chance of a Fed rate hike announced at this time. However, the Fed statement could influence mortgage rates lower.
On June 23rd the UK citizens will vote on whether they remain in the European Union or not. A poll taken last Friday showed the vote is very close, but slightly favoring leaving the EO. A “Brexit”, as it has been coined, would certainly have a widespread impact on global economies. We feel that a Brexit would more than likely help to strengthen the US dollar, weaken the US stock market and help drive “safe haven” investments such as mortgage bonds higher. This could be a force strong enough to push mortgage bonds past the overhead ceiling and drive interest rates lower. We will be watching this story as it develops and keep you posted on potential impacts as news develops.
Bonds remain in “overbought” territory, which makes the risk of floating very high. Unless bonds are able to make a decisive break above the ceiling, we will maintain our locking bias.