Will bonds bounce?

As we anticipated, mortgage bonds deteriorated further yesterday afternoon and are now right near support.  Where bonds move from this point will be largely decided based upon the results of a 10 year treasury auction that will take place today at 11:00 a.m. MST.  If bond buying is strong we will likely see mortgage bonds and the 10 Year Treasury Note improve.  However, if buying is weak we could see the 10 YTN yield rise above the critical 2.02% mark that we identified as a critical line in the sand.  If yields breach this level, mortgage rates will almost certainly tick higher.

Oil prices fell about 3% yesterday, halting a three session rally higher.  This run higher in the month of February was anticipated and is likely just a move higher in an overall downward price cycle.  Since markets rarely fall in a straight line, the price of oil can have times of moving higher even though it is still on a downward channel.  It seems likely that at some point in the second quarter of 2015 we will see oil prices fall below the recent lows, with many analyst anticipating a drop to the $35 per barrel range.  However, anything can happen in this volatile market.

With mortgage bonds riding the bottom of a channel we are hopeful that they will bounce higher.  However, the longer they sit on the support line the heavier they become and more likely to make a break below.  Although there is a high risk of floating, chances are we will bounce higher.  Watch for the results from today’s 10 YYTN auction, as the direction of rates may be based on what happens today.