Volitility is high

Last Friday, mortgage interest rates reached new highs not seen since late April.  Fortunately, the steep drop in bond pricing was halted by the 200 day moving average, which appears so far to be the support we have been hoping for.  The 10 Year Treasury Yield was also held at 2.62%, which is just under its 200 DMA of 2.65%.  The sharp loss in bond pricing all took place while the stock market was under pressure.  Typically, the bond markets improves when the stock market is falling.  However, a drop in bond pricing can sometimes seem unstoppable.  This was a case where bad news in the economy, such as a drop in the stock market, will only serve to slow down deterioration in the bond market.  From the beginning, a drop to the 200 DMA seemed to be a forgone conclusion.  It was just a matter of how long it took to get there.

Empire State Manufacturing, which measures the strength of manufacturing in the New York region, came in significantly higher than expected.  While the markets expected a reading of 15.9, they were surprised to see the actual report at 27.54.  This was the best reading in almost five years.  Speaking of manufacturing activity, both Industrial Production and Capacity Utilization were weaker than expectations.  Capacities at factories dropped from 79.1% down to 78.8%, which are the lowest levels since February.  These numbers decreasing are deflationary, which is positive news for the bond market.  We’ll get a read on inflation tomorrow and Wednesday by the way of the Producer Price Index (PPI) and the Consumer Price Index (CPI).  Hopefully, for the future of low interest rates, both will be tame.

With mortgage bonds bouncing off the 200 DMA, we are hopeful that bonds will now stabilize and maintain their current trading range.  However, there is still a chance that the damage will continue.  We are going to suggest a carefully floating bias at the moment, as we watch the markets closely to ensure they have found their bottom.  Stocks are heading lower, which should help support bond prices.  If you choose to float, we suggest keeping an eye on the markets.  Volatility is high, and markets can reverse courses quickly.