Short term locking bias

Mortgage bonds hit the top of their trading channel and dropped lower this morning, as the bond market looks to take a break from its run higher.  From a technical standpoint, this is a negative indicator in the short term.  Further, bonds are currently over-bought, meaning they are due for a bit of a selloff.     Also, bonds are now testing a ceiling of resistance that has held them below this point for more than six months.  Each of the last few times mortgage bonds hit this critical ceiling, they fell sharply in the days and weeks to follow.

Today is a relatively quiet economic news day, as is this entire week.  We did have a higher than expected ISM Non-Manufacturing Index for April.  It was reported to be 55.2, which is higher than last month’s 53.1, and also beat market expectations of 54.2.  Immediately following this report, mortgagebonds went from positive to negative, showing the market’s sensitivity to economic progress.

With mortgage bonds facing a strong ceiling of resistance, being over-bought and seemingly losing steam, we will suggest a short term locking bias.  If bonds are eventually able to break through the ceiling, we could be in for a nice run higher.  However, recent history shows this would be an unexpected accomplishment.  We will be watching closely and keep you posted.