Mortgage bonds are trying to stabilize after taking a beating again on Friday. With the 10 Year Treasury Note yield still trading above its 200 day moving average, mortgage bonds are feeling the pressure. Mortgage interest rates have moved up the past couple of weeks and are still in an upward trading pattern, which has been heavily influenced by the rising yields in the 10 YTN market. The technical picture shows a strong likelihood for the 10 YTN yield to move closer to the 1.9% or even 2.0% mark. This would further deteriorate mortgage interest rates by 1/8% – 1/4%.
Tomorrow’s Consumer Price Index (CPI) report could be the determining factor as to whether or not bonds will continue to break down. If inflation on the consumer level is stronger than anticipated, mortgage rates will likely take another step higher. Friday’s Producer Price Index (PPI) report showed stronger than anticipated inflation on the producer level. This may be an indicator of upward inflationary pressure on the consumer level as well. Since inflation is the arch enemy of mortgage interest rates, tomorrow’s report is of high importance to the bond market.
With bonds still under pressure, the safe play is to continue a defensive strategy and maintain our locking bias.