Yield Curve Narrows

Mortgage bonds continue to bounce from the top of the trading range to the bottom, as the market trades within a very tight channel.  Bonds are currently trading lower and are now once again nearing another floor of support.  We will likely see further deterioration before markets begin to improve.  However, since there are a couple floors of support beneath current levels, hopefully the downside move will be limited.

Oil prices just hit a 3 year high, which you may have noticed last time you filled your car up with gas.  This is generally a negative signal for the bond market, as it tends to trigger higher inflation as manufacturing and delivery costs rise with the higher oil prices.

The spread between the 10 Year Treasury and the 2 Year Treasury just dropped to a low that we haven’t seen since 2007.  We all remember what happened shortly after that time.  If the longer term rates don’t move up with the Fed Funds rate after the next Federal Reserve rate hike, we will see the yield curve narrow even more.  Although a cross-over in the yield curve doesn’t mean a recession is imminent, it has accurately predicted the last 7.

Until bonds are able to show the strength to break above the trading channel, we will maintain our locking bias.