Very cautiously floating bias

As anticipated, mortgage bonds reached their best levels since May 2013 and were forced lower.  A break above this level would have put mortgage rates at levels not seen since before May 2013.  However, it just wasn’t in the card for yesterday to be the day.  However, the momentum build up may eventually be strong enough to break this critical barrier.  If that does happen, it will likely be a dramatic move higher which will push mortgage interest rates lower.  With competing Country’s government debt paying significantly lower yields than what can be earned in the US, the demand for US 10 Year Treasury Notes continues to increase.  The increased demand is pushing bond prices higher which drives interest rates lower.  This is why we can continue to see low mortgage interest rates in a strong economic environment.  If bond prices were set just based on US demand, prices would be lower and interest rates would be higher.

The Mortgage Bankers Association released their reports on mortgage application data.  It showed that purchase mortgage applications were up 1% last week.  Purchases are now down only 4% from where they were one year ago.  However, that is because it has not been a bit over a year since purchase loan volumes drop dramatically.  The lower levels of home purchases was largely a result of higher mortgage interest rates.  This proved to the market that the housing industry is not yet prepared for higher mortgage interest rates.  At least for the time being, the purchase market is being supported with low interest rates once again, which will hopefully continue to drive more home sales as we head into 2015.

Mortgage bonds made a move towards the bottom of a trading range.  This was actually a healthy move lower and another opportunity for bonds to build additional strength to make anther attempted run higher.  Bonds are further being supported by continued weakness in the stock market today.  So overall, from a technical standpoint bonds have the upper hand so far this morning.  In light of the good news for bonds, we are going to begin the day with a carefully floating bias.  However, be careful of a rebound in the stock market.  Should that happen, bonds will be pressured lower.  That is a high likelihood at some point today.  Should bonds lose steam and head lower, we will quickly switch to a locking bias.