Mortgage bonds are once again falling lower this morning, as the upward momentum in the stock market continues to pull money out of the bond market in search of greater returns. The VIX, or volatility index, closed at the lowest level it has seen since 1993. Historically, this is a negative sign for the near-term direction of the stock market. Stocks are clearly due for a correction. However, they have been for some time. When this does happen, it should provide some support to the bond market as money will certainly flow out of stocks and into bonds. There is no way to say when this will happen. However, with the VIX at 14 year lows, we feel there is reason for great concern.
From a technical viewpoint, mortgage bonds are now sitting at the bottom of their channel. With support provided by their 50 and 100 day moving averages, bonds are now at a critical juncture. If they fall below this level, we will certainly see interest rates move a bit higher. Unfortunately, the 10 Year Treasury Note isn’t faring well, with the yield now sitting at 2.408%. This is above the strong ceiling of resistance that was once the 2.38%. If it breaks the next ceiling at 2.42% provided by its 100 DMA, yields could then jump up to as high as the 2.63% level. This will certainly adversely impact mortgage rates, as mortgage bond prices will fall in response.
With bonds at a critical level, we are hopeful support will hold. However, there is a chance it won’t. In that case, things will get ugly quickly. Only float if you can closely monitor the markets.