Mortgage bonds hit lows yesterday that haven’t been seen in many years. This put mortgage interest rates at the highest levels since 2011. Since this is unchartered water for mortgage rates in nearly 7 years, we have to look way back in history to see where we can find support. If rates continue to deteriorate, there is a long ways for bonds to fall. The hope at this point is that we see the 10 Year Treasury Note yield get back below the 3.04% level. Without that happening, we can plan for things to just get worse from here. Today’s trading pattern will be very important to the direction of interest rates going forward.
The 10 Year Treasury Note yield breaking above the critical 3.04% level is significant on many accounts. Primarily, it happens to line up with the top of a 30 year downward trading channel trend line. This means that overall, rates have been in a solid downward trading pattern for three decades. For an event to end this 30 year cycle puts us in a financial environment that many have not dealt with. An upward trending environment will lead to higher borrowing costs for consumers overall. Whether this means mortgage loans, credit cards, car loans or other, it will be an interesting change for many.
Certain financial institutions are now calling for a 4% yield on the 10 Year Treasury Note, as the market returns to a more “normal” environment. This has been echoed by many and is starting to dominate the chatter by financial pundits. Although not out of the realm of possibility, it doesn’t seem likely to me. At some point, higher rates will lead to a slowdown in the pace of our economic progress. I’m not sure at what level of interest rate will be needed to trigger such event. However, I feel it will be prior to hitting 4% on the 10 YTN.
There continues to be little incentive to float. We will maintain our locking bias.