Stocks at all time high-locking bias

Yesterday, mortgage bonds continued the trend of starting out strong and then falling as the day progressed.  As usual, the Federal Reserve’s FOMC Meeting Announcement rocked the bond markets, as they were once again forced to hear the reality that the Fed will be moving interest rates higher at some point in the near future.  Although there was really nothing new in Fed President Janet Yellen’s release and subsequent interview, she did reaffirm their plan to allow the markets to function on their own after they complete their final taper of Quantitative Easing next month.  Further, we are one step closer this month than we were at the last Fed Meeting to taking the dreaded move higher in interest rates.

Adding additional upward pressure to mortgage interest rates this morning was the release of Weekly Unemployment Claims.  It was reported that only 280,000 new claims were filed last week.  This was a drop of 36,000 from the week prior, and a strong report for the reality of a strengthening employment market.  However, it was subsequently reported that Housing Starts for August were down 14.4% at 956k units.  This was much less than expectations of 1.038M.  Further, Building Permits were reported down 6% at 998k, which is below the 1.055M expected.  So, while most market indicators are strong, the housing market continues to disappoint.  The last thing our housing market needs is higher mortgage rates.  However, that seems to be exactly what it is getting.

Mortgage bonds fell below their 200 day moving average this morning, which is something that hasn’t happened in a very long time.  This is terrible news for mortgage interest rates, and could be a sign of an even more significant drop in bond pricing (higher interest rates) heading our way.  If mortgage bonds fail to get back on top of this significant trend line, the downward movement could gain momentum quickly.  We are going to have a locking bias as we wait and see what happens.  With the 10 Year Treasury Note yield approaching its 200 DMA, we may find support to taper further losses.  However, with stocks currently at record all-time highs, the headwind against the bond market will be strong today.