With 15 minutes to go in cash Treasury/MBS trading, the market is going out on the lows (highest yields/worst mortgage pricing) of the day. Fed Governor Hoenig’s dissent looks to us like an interest rate protest or maybe it’s the first vote/trial balloon.
Traders were expecting the same old, same old and got sideswiped by the hawkish detail I just mentioned. This one is a tough call, trying to figure out if it’s the beginning of a tightening cycle or the Fed’s way of testing the market towards removal of accommodation (stopping the Treasury/MBS purchase program, etc.) With so many cross currents it’s tough to remember who’s on first.
I can tell you from a technical stand point that the market put in an outside day down, including a test of the best levels we’ve seen since November and then failing. The rejection from the top and outside day down are strong indicators of a market top in the making. This does not mean that the consolidation we expect will be huge, just that it has a very high probability. Given the fact that the 8 day moving average held, sellers will need to trade the market above 3.65% for a sustained period of time to do any real damage.
For now, the brackets to watch are 3.65% to 3.57% (we are set to close right at 3.65%). Anything outside these parameters to the high side is bearish for interest rates and below 3.57% is bullish. Given the uncertainties on so many fronts, you should expect the unexpected right along with volatile trading and mortgage pricing. Hopefully, the State of the Union Speech will give us a little help.