Geopolitical Headlines Moving Markets

Mortgage rates moved lower today as terrible events around the world fuel demand for bonds, prices of those bonds rise, causing rates to drop. Mortgage Backed Securities (MBS) tend to move in the same direction as Treasuries. Today was no different, but with geopolitical headlines moving markets, Treasuries get more of the benefit with the net effect resulting in a strong and steady improvement in bond markets.  The gains leave 4.25% as the most prevalently-quoted conforming 30yr fixed rate for top tier scenarios, but quickly brought 4.125% into the picture with a little bit of a cost.

This morning housing starts and permits were extremely low based on estimates.  Some want to blame it all on the 20% decline in the southeast region, likely there is something to it but spinning the report as some kind of glitch doesn’t match with other housing data that has continued to be weak.  All of the market focus though changed this afternoon, back to safety buying of treasuries on the breaking news of a Malaysia Airlines plane downed in eastern Ukraine. 295 people on board at 33K feet, the plane exploded.  The obvious initial speculation turned to Russian separatists using Russian missiles.  So far there is no evidence to substantiate it or confirm the reason for the plane exploding.  Current reports are that the black box has been recovered. The Malaysian plane disaster at the moment has more questions than answers.  Ukraine officials saying it was terrorist attack, Russia saying they know nothing, separatists blaming Ukraine.  

The stock market took a hit, interest rates fell, the 30yr bond is at its lowest level in a year, the 10yr treasury note yield fell to 2.47% from 2.53% yesterday, MBS prices flowed but lagged as this is a safety trade, not fundamental to the US economy.  Once again geo-political events are influencing US interest rates.  Media is on alert, look for loads of details as the evening goes on.

Technicals are bullish, but useless for the moment because the reaction today is still based on speculation.  The stock market falling and interest rates falling are reactionary moves that ignore all economic fundamentals.  Gold increasing, crude oil prices increasing -  all markets are in reaction modes. The main takeaway today is that geo-political conditions remain, whether on the front page above the fold or below it. The market reactions to the plane incident will likely dominate trading again tomorrow ahead of the weekend. Early tomorrow morning, about 3:00 am Europe’s markets will begin and there will be more known about the situation, how Europe trades will directly impact how US markets start the day tomorrow.

In summary, news of the Malaysian airliner being shot down over Ukraine has sparked a flight to safety trade where investors sell stocks in favor of bonds. The news helped push the benchmark 10yr note to the bottom of our recent range at 2.47 which has been very solid resistance. I have been saying the last few days to float the highs and lock the lows....however, even though we are at the best levels in quite some time, I would recommend floating overnight to allow additional time to pass to see what happens.