Mortgage bonds remain trapped just beneath their 200 day moving average, not yet having the strength to make a run higher. The bond market has been the beneficiary of a falling stock market, which has lost just shy of 5% of its value in just four trading days. This has caused the flow of money to move out of the stock market and into the bond market, which is helping support lower mortgage interest rates. However, the flow of money into the bond market has not matched the drop in the stock market. We would normally expect a stronger move higher in the bond market when the stock market is under this level of pressure. The reason is likely attributed to the market taking this stock market drop as cause for the Fed to delay raising interest rates. The bond market REALLY would like to see the Fed make a move to protect against future inflation. Therefore, investors are hesitant to put their money in bonds at this time.
If the stock market continues to fall, we could see bonds gain the strength needed to make a break higher. That would be a significant move for the near term direction of mortgage interest rates. A decisive break above or below a 200 day moving average level is often a sign of a reversal change. After breaking below its 200 DMA in early June of 2015, mortgage interest rates jumped higher as the bond market experienced a drop of more than 200 basis points in just a short number of days. If bonds make a break higher, they will have room to make significant improvements. That would be a welcomed sign to homebuyers who are looking to make a move this fall.
Unless bonds are able to make a break above the 200 DMA, we will maintain our locking bias today. If you choose to float, watch the markets closely. Keep your eye on the stock market for sure. If stocks are able to correct their losses, it will certainly come at the expense of the bond market.