The most concerning indicator as I review the charts this morning is the narrowing spread between the 10 Year Treasury Note yield and the 2 Year Treasury Note yield. Although many yields are currently inverted, this has not yet crossed. However, the spread now has narrowed to only 10 basis points, which is the closest the two have been in 11 years. Since this is one of the most accurate indicators of a recession, the narrowing spread should be deeply concerning to those who don’t believe we will soon find ourselves in a recession. Once this crosses, it is nearly a sure thing that within two years a recession will be upon us. So, watch this level closely, a recession will impact all of us.
Despite all the volatility in the stock market, mortgage bonds have remained within their trading range. It’s crucial that bonds hold the current channel for mortgage rates to remain near current levels. If this level is breached, the damage could be great. There are multiple floors of support propping bonds up right now. To break beneath them would just create challenges for the bond market as bonds would then be forced to break above them in order to get rates back to where they are today. I believe we will see bonds hit the bottom of the trading channel before showing any strength. So be on guard, I see things getting a bit worse before they get better. But I do believe they will get better.
Although bonds have strong support, you must be careful. Only float if you are able to stomach the risk.