Watch the market closely this week

Thanks to weakness in the stock market, mortgage bonds are improving so far this morning.  The seesaw relationship between stocks and bonds has been very prevalent lately.  Both are moving in a somewhat sideways trading pattern the past couple months, but stocks being the ultimate victor with an overall net gain.  Today is a relatively quiet economic news day, so the bond market will likely take its direction from the stock market for the day.  Fortunately for the bond market, both the technical picture and the stock market are working in the bond market’s favor today.

Geopolitical tension with Russia and Ukraine, as well as Israel and Hamas, continue to dominate the headlines today.  There has been a great deal more rhetoric and talk of sanctions against Russia after the Malaysian Airlines plane was shot down last week.  As a result, there has been a “flight to quality” where investors have been selling stocks for the safe haven of bonds.  This helps boost bond prices, which drives interest rates lower.

One of the greatest threats to mortgage interest rates this week will be the reading on consumer inflation, which will come tomorrow.  If inflation is higher than expectations, we will likely see mortgage bonds move lower, pressuring interest rates higher.  If inflation is still within acceptable boundaries, we could see bonds move to the top of their current trading channel.  One thing if for certain; the Fed will be closely watching inflation reports.  They have made it clear that they are prepared to increase short term interest rates if our economy or readings on inflation warrant a move higher.

With mortgage bonds making a nice run higher so far this morning, we see no reason to lock right now, let’s give bonds an opportunity to move to the top of their trading channel.  As we often say, sentiment can change quickly.  If you choose to float, don’t take your eyes off the market, and be prepared to lock should weakness develop in the bond market.