Mortgage bonds remain trapped within their wide channel, sitting just beneath resistance at their 200 day moving average. However, they are receiving a boost from the 10 Year Treasury Note Yield, which has made its way below its 200 DMA. This is a significant move for the 10 year note. If the 10 year yield is able to remain beneath this important level, that could help mortgage bonds accomplish the same goal. Adding additional support is the falling price of oil, which is now just a hair north of $40 per barrel. This significant move lower adds additional deflationary pressure on the economy, which is precisely what helps hold mortgage interest rates low. Combined with China’s move to reduce the value of their currency, we could see continued improvement in the interest rate market as a result over time.
The stock market is looking to open lower this morning, as the price of oil adds headwind to the market. Today could be a critical day for both stocks and bonds; with both facing a fierce battle at their 200 day moving averages. If stocks fall beneath this level, that will add a much needed boost to the bond market, which could provide the needed catalyst to drive mortgage bond pricing higher. However, this is also the point at which mortgage bonds could stall. Stocks have been known to bounce higher when they hit this level. That would likely cause the bond market to sell off, pressuring interest rates higher.
Recent history tells us that this is the point to lock in a rate. Since breakouts are difficult to predict, until a breakout occurs, the risk of floating while at the top of a channel is high. Therefore, the safe play will be to lock. If you choose to float to see if bonds are able to win the battle of the 200 DMA, do so carefully. Watch the markets closely, as sentiment can reverse quickly.