Rate Update March 6, 2008

We continue to track technical trading patterns today. After falling below the 100-day moving average mortgage backed bonds fell sharply to the 200-day moving average (indicated by the blue line) as we expected. If you’ll remember mortgage rates move inversely with the price of mortgage-backed bonds so as a result of the sell-off yesterday (indicated by the red lines at the end of the chart below) interest rates also increased sharply yesterday. So what to do from here?

We are recommending a floating position for two reasons. First, as you’ll see below on the chart the 200-day moving average has been a very strong layer of support over the past two years. Of the 8 times in which mortgage-backed bonds touched the 200-day moving average it only managed to break-through once in May of 2007. Every other times mortgage-backed bonds bounced higher and rates improved.

The second reason is because the monthly jobs report is due out tomorrow. As we’ve talked about previously in ‘rate update’ the monthly jobs report often drives the direction of mortgage rates for the 1-3 weeks following the release of the report. When the jobs report shows stronger than expected jobs growth it will put pressure on mortgage rates to move higher and vice versa. Given that most of the economic data out recently has been weak we think the jobs report may also fall short of expectations. This should help support bond prices and hopefully push mortgage rates lower.
The one bit of caution is that should bond prices move below the 200-day moving average we would see rates continue to move higher sharply. Last time this occurred bond prices took 5 months before they could break back above this level.

Current Outlook: floating