Mortgage bond prices continue to drift lower, which is adding upward pressure to mortgage interest rates. One headwind to the bond market has been an exceptionally strong stock market that has made up nearly two years of gains in the past 3.5 months. That’s a level of optimism in the faith of the US economy that seems irrational given that we are now in the late stages of an economic expansion cycle. However, stock investors generally wait until the last minute before cashing out. Therefore, when sentiment turns negative, there is a mad exit out of the market. That will be something investors will be dealing with sooner rather than later.
Speaking of the stock market, current prices are now within just a short distance of all-time high levels. We need to be careful as stocks approach this ceiling. It could be a trigger point where many investors have pre-sell orders in place. If so, we would expect to see mortgage bonds be the beneficiary, which would add downward pressure to interest rates. In today’s world of technical trading, although it’s easier to predict market changes, it elevates volatility.
Given the ongoing weakness in the bond market, we will maintain a locking bias.