Locking bias

Mortgage bonds took a turn for the worse this morning, as the 10 Year Treasury Note yield broke above its 200 day moving average and mortgage bond prices broke beneath their 100 DMA.  If the 10 YTN yield closes above its 200 DMA, this could signal a change of direction for mortgage interest rates.  Typically, once this line is crossed they remain on the other side for a prolonged period of time.  That would mean mortgage rates will begin an extended period of climbing higher.  We will have to watch and see where bonds close at the end of today.  It could be one of the most significant trading days we have seen in many months. 

It was near this time last year when mortgage rates jumped higher.  At the time, the increase lasted up until the point at which the Fed raised interest rates.  After that point, rates moved lower.  Unless there is a dramatic change for the worse in the Use economy between now and December, it is widely believed the Fed will raise rates at that time.  As we saw the last time this happened, talk of a rate hike creates upward pressure on mortgage interest rates.  However, the actual move can help mortgage interest rates soften.  Why is that?  Basically, the stock market has been artificially held higher by lower Fed interest rates.  As the Fed slowly removes the punch bowl, stocks will become more volatile.  Investors then begin looking for a safer alternative to place their money.  In many cases, mortgage bonds become the beneficiary, which drives interest rates lower. 

With bonds still breaking down, we will maintain our locking bias.