Risk of floating is elevated

Mortgage bonds continue to drift lower, heading down to their next floor of support that rests about another 25 basis points beneath current levels.  This movement is creating a sharp downward channel that could drive interest rates even higher before bonds move outside of its path.  One critical determining factor will be the 10 Year Treasury Note yield, which currently sits at 1.88%.  There is an important Fibonacci level right at 1.9%.  A break above this level could spell trouble for mortgage rates.  Yields on the 10 YTN would then have a free shot up to their 100 day moving average, which now sits at 1.965%. 

The fall in bond prices is simultaneously occurring at the same time stocks have drifted lower.  Typically, a move lower in stocks would help support bond prices.  Since the move in both markets appears to be driven by technical factors and profit taking, the traditional correlation between stocks and bonds is not currently at play.  In addition, oil prices are moving higher, which is dragging on mortgage bonds.  Again, this would typically cause stocks to climb higher in response.  However, stock investors seem resistant to placing bets on the stock market at the moment.  If the 10 YTN yield moves above the 1.9% mark, stock investors may feel more compelled to jump back in.

With mortgage bonds still having room to fall before hitting their next floor of support, the risk of floating is elevated.  We will maintain our locking bias.