14 May Stocks Move Higher
Stocks are climbing higher today, which can be somewhat expected after yesterday’s tremendous fall. The market’s volatility is again tied to the trade negotiations between China and the U.S. Until a final trade deal is agreed to, we can expect to see this trend continue. The concern with stocks moving higher is what this will do to the mortgage bond market. Since mortgage bonds compete for the same investment dollars as the stock market, bond prices tend to fall as stock prices move higher. Although we haven’t seen that happen today, we could see the strength of the stock market push bond prices beneath the critical level we have discussed the past couple of weeks. If that happens, we will see upward pressure on mortgage interest rate pricing.
We are starting to see signs of a positive scholastic crossover in the 10-Year Treasury Note yield. This is an early indicator of higher yields in the short term. Although mortgage interest rates aren’t directly associated with the 10-YTN, mortgage bonds and the 10-YTN tend to trade in a similar pattern. If yields on one move higher, we generally see the other follow suite. With this early indicator pointing to higher yields in the near term, this means that we could see upward pressure on mortgage interest rates. Since mortgage bonds have experienced a relatively flat move as stock prices have dropped, this means the market may not be ready for mortgage interest rates to take another step lower.
Given the indictors of higher yields in the near term, we will maintain a locking bias.