11 Feb Risk of floating is elevated
Mortgage bonds hit right up against the significant level of resistance we have identified in recent updates, and were forced back beneath this level. This is a bearish sign for mortgage bonds and could represent the beginning of a pull back. Even if bonds are able to muster the strength to break above this barrier, there is another significant resistance level about 50 basis points above the first resistance. Since that represents a level that hasn’t been broken in multiple years, that would likely prove to be more challenging to break above. Therefore, the risk of floating presents only minimal likely gain in the event of a breakout.
As we reach these low levels of mortgage interest rates, it is important to reiterate some of the rules we follow in predicting the near term direction of mortgage bonds. First of all, when bonds are trading within a well-defined range, the rule is that they will bounce from the bottom to the top of the range often during the cycle. Therefore, we typically suggest locking when at the top of a range and floating when near the bottom. Because breakouts do sometimes happen, we must be mindful that although rare, we must be prepared to lock or float in the event that occurs. However, breakouts are always the exception and should never be counted on. Understanding these simple rules will better help you navigate our daily updates.
With mortgage interest rates within striking distance of multi-year lows, now represents a great time to lock in on transactions planning to close in the near term. The risk of floating is elevated. If you choose to float, do so carefully.