After an extended weekend, mortgage bonds have so far this morning recovered some of the losses they suffered on Friday. The strength in the bond market this morning is mainly centered on ECB meeting out of Europe. The ECB is essentially the European version of the US Federal Reserve. It is expected that they will announce an asset purchase program equivalent to a $500 billion Quantitative Easing. This will further press European interest rates lower, which will make US bonds (including mortgage backed securities) more attractive. This should help keep interest rates in the US low, as money will likely flow from Europe into the US markets.
The plummeting price of oil combined with a strong US dollar is adding additional strength to the US economy, at least at the moment. However, there are many areas in Utah that are made up primarily of oil based jobs. In Uintah County, for example, up to 60% of their economy is based on revenue derived from oil. As oil prices fall, their economy will weaken. Utah is an oil rich state, which will eventually be damaged if oil prices don’t recover. This will eventually impact housing prices in many Utah markets. We must consider this potential impact to our local economy as we celebrate the cheap prices we are now paying as we fill up our gas tanks.
Mortgage bonds are currently sitting just beneath two points of resistance. However, the 10 Year Treasury Note yield just fell beneath 1.78% once again. This is going to help out mortgage bonds which could keep interest rates from moving higher. However, with mortgage bonds just beneath two layers of resistance, the safe play will be to maintain a locking bias. If mortgage bonds are able to show that they have the strength to break above, we could see some nice improvements. However, we are at levels we haven’t seen in many months. Therefore, there is no recent history to support an imminent break higher.