A consolidating mortgage market

Yesterday, despite the indicators moving against us, the mortgage backed securities market showed incredible resilience losing only 3 ticks over the course of trading. This morning, we are up three ticks, putting as back in familiar territory. That is not a reason to sounds the all clear. With our market consolidating, it appears as though we are heading for a breakout which will lead us high into a new range or lower into a more historic range.

At this point in time, I'm leaning towards the sell off. Call me a pessimist but the reaction to the downgrade was compulsory. Investors flocked to the very investment that was downgraded... and fortunately we benefited from this yield reduction with the MBS tracking the 10 year treasury closely. We all know this downgrade will lead to higher interest rates, the question is when. This consolidation could be the beginning to the perpetual slide we all fear.

Yes the Fed has announced they will keep rates pegged low through 2013, which is an unprecedented event (their dating a future action), but this announcement may not be enough to do the trick, and when investors do decide to sell off, I do not think the Fed is going to be able to say or do anything to stop them.