Mortgage bonds have formed a nasty downward trading channel that has now pushed bonds beneath multiple floors of support, including the 50-day moving average which was broken in early morning trading today. This downward channel has moved mortgage interest rates ¼% higher in less than 2 weeks, which has shocked many who have been waiting to lock in a low rate while rates were still heading lower. The pain of waiting is now taking its toll, as many regret not moving forward when the market was more favorable. With bond prices now beneath their 50-day moving average, there is more room for mortgage bond prices to worsen before hitting the next significant floor of support. At this point, we would expect that to happen.
The 10-Year Treasury Note yield has shot significantly higher since breaking above its 25-day moving average and is currently trading at 1.74%. The good news for the bond market is that it remains beneath an important Fibonacci level that is set at 1.779%. If this ceiling holds, we can expect to see mortgage bond pricing to likely stabilize as well. However, if this critical level is broken, we can expect things to get ugly quick. This would mean higher mortgage interest rates still to come. Now keep in mind that I still see lower rates in the future. Markets never move in a straight line. The recent upward move may just be temporary.
There is an old saying in the mortgage bond market – “Never try to catch a falling knife.” What this means is that when the bond market is falling as sharply as it is right now, it’s not a time to gamble. Therefore, we will maintain our locking position.