May 20

Mortgage bonds are pointed slightly higher this morning, as the stock market appears to be under pressure.  After coming within a whisker of all-time highs yesterday, investors seem weary about the near-term direction of stocks.  Given the inverse relationship between the stock and bond markets, continued pressure in the stock market will provide support to the bond market, helping to push interest rates lower.  Adding additional support is the yield on the 10 Year Treasury Note, which is currently near lows last seen in November 2013.

Today will be a quiet economic news day, so the technical picture will again drive the bond market.  There has been a shift in the fundament outlook for interest rates in the near-term.  While most experts predicted rates to be much higher by now, mortgage rates are actually lower now than they were at the beginning of 2014.  The reduction in rates has been primarily driven by weaker than expected GDP and slower overall economic growth.  We have had disappointing home sales, a slower growth of home values, and fewer job creations than many experts expected to see.  This may eventually be felt in the stock market, which would also help support lower interest rates.

With mortgage bonds currently pushing higher, we will suggest a floating stance today.  As mortgage bonds approach the next ceiling of resistance, they will be testing levels not seen since June of 2013.  Volatility will likely increase as we get closer to this point.  Again, watch the stock market closely.  A move higher in stocks will make a continued bond market rally unlikely, while a drop in stocks will help support lower interest rates.