18 Oct Placing Hope in the 200 Day Moving Average
As anticipated in yesterday’s market update, mortgage bonds fell hard after nearing the tip of the trading channel. This predictable move aligned with the stock market once again hitting new all-time highs, which added to the upward pressure on mortgage interest rates. However, with bonds remaining within the trading channel, we can anticipate the floor of support holding. Therefore, the damage to mortgage rates should be minimized. With the 200-day moving average serving as the floor, it would take a strong economic report to push bonds beneath this level. Therefore, we will maintain the rule of locking when at the top of the channel and floating when at the bottom. This rule will remain in place until we see more dramatic news that causes bonds to break out of the channel in one direction or another.
The Brexit movement has been under pressure in recent days, with some leaders of European countries expressing their opposition to the move. This is an extremely relevant topic to mortgage interest rates. If we look back upon the massive improvements the Brexit movement created for the U.S. mortgage market, we see the amount of improved pricing that has been baked into mortgage interest rates as a result. If the Brexit move is reversed, mortgage rates will suffer. This is the type of news announcement that would trump any technical analysis. Therefore, we must follow this story closely and be prepared to lock in should the Brexit move become a serious question.
The greatest technical threat to mortgage bonds is currently the 10 Year Treasury Note yield breaking above its 200-day moving average. This adds upward pressure to mortgage interest rates. However, unless bonds break beneath their 200 DMA, this level will serve as strong support for mortgage bonds. We will now switch to a floating bias to see if this level will hold. If it fails, lock immediately.