29 Aug Risk of a reversal remains high
North Korea’s Kim Jung-un is at it once again. This time launching a ballistic missile right over Japan. As one of the most provocative missile tests in North Korea’s history, it has prompted the government in Tokyo to warn their residents in its path to take cover. Although after a nearly 1,700-mile flight, the missile landed harmlessly in the sea. The statement made to the world through this action was dramatic. This comes just days after President Trump made reassuring comments that Kim Jung-un is starting to respect the US. Clearly, this does not seem to be the case. The tension is sure to escalate following this provocative move. This is causing concern for many stock investors who recognize the escalating risk of continued conflict.
The 10 Year Treasury Note yield continues to remain below the critical 2.18% level. This strong indicator is helping maintain downward pressure on mortgage interest rates. In fact, mortgage bonds started the day sharply lower. However, because they experienced a gap-down opening, odds are that the gap will close in the next couple of days. This means we will likely lose the gains experienced this morning. Further, because breakouts are difficult and rare, we need to be skeptical of any improvements until bonds have proven a decisive break. Although indicators are positive, the risk of a reversal remains high.
We will maintain our locking bias until bonds have proven their breakout.