Locking bias

Mortgage bonds have fallen beneath support this morning, slicing through the 25 and 50 day moving averages like a hot knife through butter. This increasingly boring trading pattern has been the path of bonds for several weeks now. The best part of the pattern has been the stability it has provided to mortgage interest rates, keeping the APR of a conventional 30 year fixed near 3.4% the entire time. This has been helpful for summer home buyers who have only experienced mild changes in the cost of a mortgage rate as they go through the home buying process. 

10 Year yields across the globe have been on the move higher, just as we have seen here in the US.  One driver of higher rates here at home has been the onslaught of Fed members jumping on the rate hike band wagon.  Most recently, Eric Rosengren, Boston Fed President and voting member, changed his tune in comments made early this morning.  Historically, he has been one to argue the need for maintaining lower rates.  However, he mentioned that failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.  In other words, he now believes the Fed should hike rates.  Although this could actually help lower yields on mortgage rates, the market doesn’t like the talk of a rate hike. 

Although we are now at the bottom of a channel, I’m not liking the looks of the charts.  This could be the time we break out of the channel in which bonds have been stuck.  Unfortunately, this would be a break to the downside.  In light of the risk, we will maintain a locking bias.