The most significant development of the overnight session was the early morning passage of the spending bill in the House. This resulted in only a modest extension of losses in stocks/bonds, mostly because stocks/bonds (mostly bonds) have been pricing this in throughout the week. Yields actually managed to recover into positive territory before the 9:45am ET econ data, and haven’t changed much since then.  All in all, an exceptionally underwhelming level of volatility given the news and the fact that this is our only real morning of econ data this week.

Yesterday I headed west from the conference while my son Robbie headed south to the nCino nSight event. But while in Manhattan Dawn S. asked me, “How do you know if there’s a vegan at your party?” Answer: “They’ll tell you.” It’s not hard to find someone to tell you why the “Sell America” trade is rampant in the financial markets, impacting rates and borrowers, and reminding us that politics and lending are indeed entwined. The U.S. should curb its “ever-increasing” debt burden, said Gita Gopinath, First Deputy Managing Director of the International Monetary Fund, in an interview with the Financial Times published Tuesday. Recall that Moody’s downgraded the U.S. credit rating due to rising government debt and interest payments, and as fiscal analysts raise concerns over Donald Trump’s proposal to extend and expand tax cuts. Gopinath noted that recent developments, including a truce on tariffs between the US and China and a US-UK trade agreement, are positive, but said “very elevated” trade policy uncertainty continues to affect the US economy. The IMF lowered its US growth forecast in April, citing trade tensions as a significant factor. The nation’s growing debt reflects a persistent imbalance between government spending and revenue, with no clear reversal in sight: regardless of party, no politician seems to be able to say no. (Today’s podcast can be found here and this week’s is sponsored by Xactus and its commitment to the continued transformation of the mortgage verification industry. Pioneering a new class of technology, “Intelligent Verification,” Xactus is redefining how the industry originates and services mortgages. Today’s has an interview with Finance of America’s Ashley Smith and Ryan Schmidt on why reverse mortgages deserve more attention from the broader mortgage industry and what’s holding back adoption.)

Fair Isaac Corp.’s shares saw their worst day since March 2020 on Wednesday, falling alongside credit bureau stocks after the head of the Federal Housing Finance Agency questioned credit report pricing.

The contract rate on a 30-year mortgage rose 6 basis points to 6.92% in the week ended May 16, according to Mortgage Bankers Association data released Wednesday.

The president said he would consult with the heads of Treasury, the Commerce Department and the Federal Housing Finance Agency he comes to a decision.

As private credit tops $1 trillion, Fed researchers warn bank exposure to the sector could spark systemic risk if defaults spike.

Getting settlement agents and other stakeholders involved was a challenge, but e-note use has finally become routine for some mortgage lenders buying loans.

Treasury Auction Blamed as Bond Vigilantes’ Smoking Gun

Vigilante justice!  Taking matters into one’s own hands!  It’s a sensational concept when applied to the bond market, but the term hasn’t really done us many favors over the years.  It happened to work for a headline today because the term is as over-the-top as the notion that today’s 20yr auction was some magical “ah ha” moment leading to a massive reprimand of congressional budget negotiations in both stocks and bonds. In actuality, the auction was fairly average–certainly nothing that warranted the stock/bond swoon, but if markets were looking for an excuse to sell (a smoking gun?), it was one of the only options. 

Market Movement Recap

09:21 AM weaker overnight amid ongoing budget battle. MBS down just over a quarter point and 10yr up 5.3bps at 4.541

01:04 PM A bit weaker after 20yr auction.  10yr up 6.5bps at 4.553 and MBS down nearly 3/8ths.

02:37 PM Additional selling in both stocks and bonds.  MBS down half a point and 10yr up 9.4bps at 4.582.  Weakness looks to have stabilized for now though.

Two days ago, mortgage rates began the day at 7.04% before mid-day improvements brought the average back down to 6.99%.  Today started out in a similar vein with the average lender at 7.05%, but the mid-day movement only made things worse. In terms of catalyst events, the bond market (and stock market, for that matter) swooned after a scheduled auction of 20yr Treasury bonds. The auction results were weaker than expected, signaling lower-than-expected demand. When demand is lower for Treasuries, it puts upward pressure on bond yields (aka “rates”). Notably, the 20yr auction results were hitting at the same time that some updates were coming out regarding the budget debate in congress.  In general, the bond market has not been enthusiastic about how that process has evolved. Bonds were hoping for a tighter leash on spending because lower spending implies lower bond issuance–something that would help rates move lower, all other things being equal. At this point, all potential iterations of the spending bill involve more spending than bonds wanted. The 20yr auction isn’t all that important in the bigger picture, but it was latched onto as evidence of bigger underlying structural concerns. All that to say: bonds were weak in the morning and even weaker in the afternoon.  When bonds move enough during the day, mortgage lenders can adjust their rates for the day.  Most lenders did so. By the end of the day, this brought the average up to 7.08%–the highest closing level in just over 3 months. 

We’re now into the 3rd day of a week that’s conspicuously lacking in relevant econ data. In addition, the looming holiday weekend hinders participation and increases potential volatility. That means an extra level of impact for whatever bonds can find to move the needle. So far, all they’ve been finding is a feeling of disillusionment with the fiscal outlook as they watch congress debate spending more money on one thing vs spending more money on another thing.  Insultingly, those things are in the spotlight more for political strategy reasons than for their central role in our current fiscal spiral. So not only are we not addressing the spiral with any of the available options, we’re also highlighting the worst features of our legislative process.
While all of the above has bonds under pressure overnight, it’s worth noting that yields continue to operate in the same short-term range since the beginning of last week. That range was entered due to the US/China tariff pause.  Fiscal disillusionment is merely the factor pushing yields toward the top of that range.