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 12th 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.