20 Oct We will start with a cautious float
Mortgage bonds have stabilized for the moment and have traded in a sideways pattern for the past few days. The stock market attempted to make a run higher on Thursday and Friday, however it was unable to break out of the downward channel that it has been riding for the past few weeks. Since stocks are still within the downward channel, it is assumed they will continue to fall until they are able to stabilize and break out. With the 200 day moving average now acting as a ceiling of resistant, any attempt to run higher will face resistance. This is a good sign for mortgage bonds, which are receiving the benefit of cash flowing out of the stock market.
It is a quiet news day today, but economic data for the week heats up, highlighted by Housing and Inflation data. On Wednesday we will get the update on the Consumer Price Index (CPI). With the recent trend showing inflation data slowing, it will be interesting to see if consumer inflation is continuing to weaken. If so, that will be good for interest rates, as inflation is the arch enemy of bonds. As inflation moves higher, the real rate of return on a fixed income investment falls. This increases the rate of return bond investors require in order to achieve their minimum required real return. Therefore, the interest rate increases along with inflation.
With mortgage bonds appearing to be stable for the moment, we will start the day with a cautiously floating bias as we watch and see what direction the markets will take from here. With support not too far beneath current levels in the bond market, combined with strong overhead resistance in the stock market, it is prudent to give markets a minute to establish a path forward. However, watch closely and be prepared to lock should mortgage bonds weaken. As long as the stock market continues to be neutral or heading lower, bonds will likely hold their position today.