Yesterday’s federal reserve interest rate hike seems to have shocked the bond market, as prices are down sharply in early morning trading. In fact, bond prices are once again beneath their 200-day moving average. Unfortunately, this is putting upward pressure on mortgage interest rates, once again dashing hopes of a trend reversal in the near term. Not all hope is lost though, as the yield on the 10 Year Treasury Note is still beneath its 200 DMA. This could help slow mortgage bonds from falling too sharply, and may help bonds recover in the hours or days to come. Of course, this is assuming that the 10 YTN will be able to hold its ground at current levels.
After nearly hitting new record high levels in the stock market yesterday, stocks are falling sharply this morning. Although this would generally be supportive of higher bond prices, we aren’t seeing that happen. If stocks continue to fall, we could eventually see that help soften interest rates. However, stocks moving lower seems to be more of a technical move, which could reverse in the near term.
The Fed provided more insight as to how and when they plan to reduce their balance sheet. After three rate hikes in 2017, they are hoping to have one more this year and then start to focus on reducing their holdings of both mortgage backed securities and 10 Year Treasury Notes. The Fed will be taking a passive approach to accomplishing their goals by slowing the reinvestments of income from interest and payoffs from their holdings. This will add upward pressure to interest rates as we move into the end of 2017. Although no immediate rush, it makes now a great time to secure an interest rate.
With bonds under pressure, we will maintain our locking bias.