Mortgage Bonds on the Wrong Side of their 200-Day Moving Average

Mortgage bonds had a terrible day yesterday, as the continued stock market rally sucked the life out of the bond market. For now, the only trending support line holding bonds from falling further is the 100-day moving average. If stocks continue to rally higher, this level may be breached and rates will bump back up to highs reached a couple weeks ago. With a triple ceiling of resistance not too far above current mortgage bond pricing, it’s far more likely to see further deterioration of mortgage rates than any meaningful improvement. It will likely take a substantial piece of negative economic news to get rates heading back in the right direction. Given the recent trend of positive news, things will likely get worse before they get better.

Today is Fed day. Although we don’t anticipate any change to interest rates, markets will be listening close for any change of plan since the last Fed announcement. We believe the Fed will likely wait until the September meeting to announce the start of “Quantitative Tightening,” where the Fed will allow investment holdings to roll off their books as an approach to reducing the Fed’s balance sheet. Although it will cause upward pressure to mortgage interest rates, it will be a softer approach than if they were to sell their holdings on the open market. That would be far more destructive to interest rates and would also slow economic growth at a more rapid rate.

With the technical picture not looking great for mortgage bonds, we will maintain our locking bias.