After nearing multi-year lows last week, mortgage interest rates continue to drift higher this morning. Following nearly 45 days of gradually improving rates, this move was expected and is necessary for the market to remain healthy. Generally speaking, it is not healthy for markets to change in either direction too much in a short period of time without some level of correction. It could be that the bond market is taking a break from the run higher before making another attempt to surpass the overhead resistance level that it has not been above since 2013. We could see a total of 1/8% – ¼% increase in interest rate before we see bonds stabilize. At that point, we will know if they have the strength to make another run.
The co-dependent relationship between oil prices and the stock market continues at an unhealthy level. As oil prices move lower, so does the stock market, and vice versa. With oil prices still hovering in the $30 per barrel range, the risks to the energy sector of our economy are extremely high. The longer oil prices remain at unhealthy levels, the greater the risk of a pending recession. One key indicator of a recession is the spread between the 10 Year Treasury Note yield and the 2 Year Note yield. When this becomes inverted, meaning the 2 Year Note is paying a higher return than the 10 Year Note, a recession is likely. The spread between the two is currently narrowing, moving from +2% to now a bit below 1%. If the 10 YTN yield continues to move lower, which we expect to happen in the months to come, a recession will be more likely. However, at this point, it’s too early to make a call of an imminent recession.
With bond prices remaining under pressure, we will continue with our locking bias.