Risk is too high to float

Mortgage bonds are falling hard this morning, slicing through their 200 day moving average like a hot knife thru butter.  The drop in bonds is heavily a technical move, pressured lower by the weight of the 10 Year Treasury Note yield climbing higher.  If bonds don’t run back above the 200 DMA, this would reflect a change in the direction of mortgage interest rates.  For a number of months, bonds have been strong and interest rates have been favorable.  If we are now shifting into a market of rising mortgage rates, we can expect to see a slow climb.  Since rates never move in a straight line, we will be looking for times when rates are temporarily lower than other times.  Since we have been in a downward trend for virtually all of 2016, it will certainly be a difficult transition if this trend continues.

Tomorrow’s GDP report is of high significance.  When you boil it down, the two key drivers of mortgage interest rates are GDP and inflation.  When both are high, mortgage interest rates move up.  Since GDP is the truest gauge of economic strength or weakness, a strong report tomorrow could be the deciding factor as to whether or not mortgage bonds remain beneath their 200 DMA.  The previous read was 2.3%.  However, the current estimate is pegged at only a 1.4% rate of growth.  This is a really low bar to clear.  Therefore, the bond market could easily be set up for failure if the actual rate of growth comes in above this level.

Although there is a good chance bonds will regain footing above their 200 DMA today, the risk of floating is very high.  We will maintain our locking bias.