Locking bias

Mortgage bonds woke up to the downside this morning, breaking beneath their 200-day moving average.  This is a very negative sign for the near and medium term direction of mortgage bonds.  Generally, when bonds break beneath this critical level, they tend to stay there for a long time.  In fact, mortgage bonds stayed above their 200 DMA since January 12^th of this year.  That is roughly 10.5 months of being on one side of this trend line.  With global interest rates finally on a run higher, we could be set to be in an increasing rate market for many months to come. 

Today marks the kick off from the Federal Reserve’s 2-day meeting, with an interest rate decision set to be released tomorrow.  Although due to there not being a press conference following the announcement combined with a Presidential election next Tuesday, there is little chance of a rate hike being announced now.  However, the Fed will certainly prepare the markets for a likely rate hike when they meet next in December.  Since mortgage bonds tend to fear talks of a rate hike, we can expect for rates to creep up higher between now and the eventual hike likely set for December.

We have been in a locking mode for a while now, and will continue to maintain this stance until bonds show signs of stabilizing.