Current position: Carefully Floating

Stocks are higher and Mortgage Bonds are trading near unchanged levels so far this morning.  It’s a quiet news day, so technical indicators will dictate market direction.  The news calendar does pick up next week, specifically on the housing front. We expect the housing data to continue to be favorable, as it has been for some time now.

 One thing that we follow here behind the scenes is the shrinking spread between the 10-year Treasury note and the 2-year Treasury note.  The 2-year Note has been moving up significantly of late, and is at .91%.  And the 10-year has been in the range between 2.2 and 2.3%...and the spread between the two has been narrowing.  The spread right now is 1.37%, but you can see how much it has come down from 2.56% not too long ago.  We have seen a very steep decline in the spread between the two.  So why is this important?  If it does get to the point where it’s inverted, which means the yield on the 2-year note is higher than the 10-year note, it often signals times of a recession.  We bring this up because on December 16^th we are going to have a Fed Meeting and a Fed rate hike could take the 2-year note higher.  And if history is any guide - The hike by the Fed could be something the Bond market likes because it curbs inflation and Stocks won’t like it because it takes the punch bowl away.  As a result, Mortgage Rates could improve and Yields will go down.  If this were to happen, it could compress things even more and a recession could be in the works.  It’s something we have to keep an eye on. 

Mortgage Bonds are still trading in the middle of the range between support at 103.16 and overhead resistance at the 100-day Moving Average.  The 10-year Treasury Note Yield is also in the middle of a wide range between support at the 100-day Moving Average and overhead resistance at 2.33%.  Bonds are susceptible to a whipsaw, so we have to be careful.  We will start the day carefully floating.