Watch the market closely if you choose to float

Watch the market closely if you choose to float

Mortgage bonds have surpassed the peaks they hit over the past three years. Since we are now in waters that haven’t been chartered in multiple years, the dynamics within the market are truly fascinating. The yield on the 10 Year Treasury Note is now at 1.4664%. This is below rates we have seen in multiple years and within striking distance of 1.39%, which is the lowest yield we have seen in the history of the 10 YTN. It appears likely that we will see yields fall to at least match the 1.39% level. Since a break below that point has never in history happened, there is a great deal of uncertainty as to where bonds could go from there. There would not be historical levels to serve as floors, so the downward move could be rapid.

 

The US stock market is falling sharply once again today, with the S&P 500 falling below 2000 and the DOW falling near the 17,000 level. The rapid fall is in response to Great Britain’s vote to leave the European Union (Brexit). This gutsy move is not heavily being questioned, even by the very people who voted to make this historical move a reality. The global economy is not only fearful of this impact this move will have on the markets, but it also opens the door for other countries within the EU to follow down a similar path. There is a lot of talk of a “Nexit”, which is the Netherlands consideration of leaving. Overall, the impact of this has just started. It will be a significant driver of mortgage interest rates in months and possibly years to come.

 

Each time we have hit these levels, mortgage bonds have quickly lost significant ground. This is very risky territory. Although the safe play will be to lock, there is no immediate need to do so at the moment. However, sentiment can change quickly. Watch the markets closely if you choose to float.