Waiting to See Next Move in the Markets

Both the U.S. stock and bond markets are current at critical points, with each likely closely monitoring the other for direction. Stocks are poised to open lower when the trading bell rings, while mortgage bonds are showing a slight improvement. Today is set to be an interesting one for President Trump, as Robert Mueller is scheduled to release the first of a series of disclosures surrounding the election that could be harmful to President Trump. Depending upon the extent of damage, if any, we could see the stock market react negatively to the news. This would likely benefit mortgage bonds, which have already experienced significant improvements in recent weeks.

With the spread between 10 year and 2-year Treasury Notes now about 10 basis points apart, it’s important to understand why I believe this is a precursor to a recession. With the spread between the two inverts, you will be able to invest money and tie it up for only two years and be paid a higher return than if the money was tied up for 10. The longer you commit to an investment, the higher the rate of return is. This is a deflationary indicator, which is a sign that the market believes that longer term rates will be lower in the future than they are today. So, although this does not help push the economy into a recession, it is a symptom of one to come.

If mortgage bonds can break above their 100-day moving average, we could see another step lower in rates. Watch the markets closely if you choose to float, as sentiment can reverse quickly.