Tax Reform Takes a Leap Forward

After a bumpy road yesterday, mortgage bonds are up slightly this morning.  Yesterday’s fall was primarily due to news that House Republicans successfully passed a tax reform bill. However, with the Senate preparing to vote on their own version of tax reform, there remains a long road ahead.  If the Senate can successfully pass their own bill, the two chambers will have to craft a joint bill before congress can make it law.  Treasury Secretary, Steve Mnuchin, said he expects that President Trump will have a final proposal on his desk by Christmas for his signature.  We must keep in mind that tax reform is not friendly to the direction of mortgage interest rates.  Therefore, we could see an increased volatility as this bill moves into its final stretch.

From a technical perspective, mortgage bonds continue to be challenged by their 200-day moving average. If they can muster the strength to break above this critical level, that will be a great sign.  However, since it is considered a trend reversal indicator, we must play by the rule of locking when at the top of a trading channel.

We will maintain our locking bias unless bonds are able to break above their 200-day moving average.