19 Sep Volitile market
In late afternoon trading yesterday, mortgage bonds managed to close above the significant 200 day moving average. This was a bullish sign for bonds, and prevented what would likely have been another steep drop in bond pricing. The 10 Year Treasury Note yield also came within a whisker of breaking below its 200 DMA, which would have further pressured interest rates higher as well. Hopefully, both can maintain their positions today. If so, it will add hope that we found the bottom of this dramatic downward move that began on September 9th. With the stock market again storming higher this morning, a run higher will be a challenge with the headwind of money flowing into stocks.
Stock market investors continue to see nothing but rainbows and unicorns, as they drove the stock indexes to all-time highs again yesterday. Based on how well stocks are preforming in light of Quantitative Easing coming to an end in October, investors apparently aren’t afraid of a market that is not artificially stacked by multi-billion dollar investments from the Federal Reserve each and every month. However, it is far too early to assume that markets will actually perform well once the Fed stops pumping capital into the system. After QE I and QEII, it took a bit of time, but the stock markets fell when each of these programs expired. Time will tell, but a drop in stocks is a possible scenario.
Although mortgage bonds remain above their 200 DMA, there is a great risk that they will be pushed below this critical support level. Unless we see a pullback in the stock market, rates may be pressured higher again today. We will take the safe approach of having a locking bias as we wait to see how things play out. The treat of a continued run higher in the stock market will make a run higher in the bond market unlikely. However, bonds could bounce back later in the trading day as we saw yesterday. If you choose to float, watch closely. If bonds make a decisive break below the 200 DMA, lock quickly.