Mortgage bonds are stuck in a tight trading range between the floor provided by the 25 day moving average and overhead resistance at the 200 DMA. Bonds bounced off their 25 DMA this morning following news out of China showing a negative outlook on Chinese Banks. Once again, China is also influencing the direction of the stock market, with the DOW down more than 150 so far this morning. Stocks are also responding to lower commodity prices, as the slump in oil and other commodities continues. The rise in volatility leads to investor uncertainty, which causes prices to fluctuate even more.
The past three trading days in stocks broke the upward channel that has carried stock prices higher. This creates an opportunity for stocks to take a step lower, which may help hold bond prices near current levels. However, there is a great deal of volatility in both the stock and bond markets, so the longer term direction is difficult to predict. Investors are betting on a Fed rate hike no later than December, so traders are positioning themselves accordingly. This should continue to add downward pressure to the stock market, which could help improve bond pricing over time. We will have to wait and see.
It’s a quiet news day, so the technical factors will heavily influence the markets. With mortgage bonds sandwiched in a tight range, there are minimal potential gains today unless bonds are able to break above their 200 DMA. Since that is highly unlikely, mortgage pricing is favorable and locking is advised.