It’s a lean, mean economic calendar in store for the upcoming week – with the main interest being a look at the housing sector via May Housing Starts and Building Permits. So what will determine if Bond prices and home loan rates can continue to fight their way towards more improvement, or be pushed back to the negative? With little market-moving news in store, it will likely depend on the technicals.
Let’s be honest…does the word “technicals” just make your eyes glaze over because you think it sounds dry and boring? Ahh, but it’s not – it’s actually quite a drama that goes on as Bonds battle out the technical scene, complete with nail-biting cliffhangers and psychological intrigue.
Bonds naturally have price “floors” and “ceilings”, indicating the point at which many Traders made decisions to buy or sell, usually based on historical patterns. For example, when Bond prices are getting lower and lower (meaning home loan rates are moving higher), they generally will reach a low price point where historically, Traders will feel like the price is too good of a bargain to pass up, and jump in to buy with both fists. The price then moves higher based on the increased demand…but that low point has now become a line in the sand, where in the future, Traders will be again inclined to buy at that low point. On the other hand, when the Bond reaches a historic high point, it may mean that Traders will be inclined to sell – as they can look around and see that everyone else seems to have historically sold at that point. Yep, it’s like peer pressure! So these “lines in the sand” can be tough to break, and it usually takes some dramatic economic news or headlines to cause Traders to sell in the face of a point where they would normally consider buying, and vice versa.
Look at the chart below – the battleground. You can see where Bonds first crashed through one of these tough lines at the 200-day Moving Average marked in blue. This floor was so tough that Bonds hadn’t traded below it since August of 2006. But once the line broke…it broke hard, and Traders couldn’t seem to sell off Bonds fast enough. The 
momentum was so great, Bond prices actually crashed through another tough technical floor, shown in red on the chart. The dramatic decline of Bond prices means that home loan rates have risen dramatically in recent weeks, as you may well know.
But now – Bonds finally hit a floor (shown in green) that it appears might hold, and Traders are stepping back in to buy, helping Bond prices and home loan rates improve. But here’s the thing…the technical floors that Bonds crashed through now become ceilings – and Bonds will have to fight hard to push back higher and bring some improvement to home loan rates. And with a light news week, there won’t be any “juice” from the news to give momentum.
You’re probably on the edge of your seat by now – so stay tuned for next week’s issue, to see if Bonds were able to mount a strong enough attack to overcome the next ceiling, and help home loan rates improve.
– Patrick Dunn, Westwood Mortgage Inc. & MMG Weekly
patrick@westwoodmortgage.com