Mortgage bonds remain within a hair of their 200-day moving average, with pricing just above this critical level at the moment. However, there remains an overall weakness within the mortgage bond market. Although the 10 Year Treasury Note yield continues to remain beneath its 200 DMA, mortgage bonds aren’t showing the same level of confidence. We can expect continued volatility until mortgage bonds have the guts to decide on which direction to head.
Yesterday, Philadelphia Fed President Patrick Harker made some interesting comments on the future of the Fed Funds Rate as well as their overinflated balance sheet. According to Patrick, the Fed wants to start reducing their reinvestments back into the bond market as early as September. Since the Fed is currently purchasing billions of dollars of mortgage backed securities each week, this will add upward pressure to mortgage interest rates. Further, the Fed is wanting to get in one additional rate hike when they meet in December. Given the transparency within the Fed in recent years, this could provide a clear roadmap as to what to anticipate, which will help us better predict interest rates as the changes occur.
With bonds still showing weakness, we will maintain a locking bias. If bonds are able to show a decisive break above their 200 DMA, we will switch to a floating stance.