Bonds Talked Into Modest Gains by Europe

US bond traders didn’t necessarily come into work with the intention of adding to yesterday’s rally.  It was only after European bonds exploded into stronger territory that US yields grudgingly followed–very grudgingly.  In fact, as soon as European trading wrapped up for the day, US yields rose back to meet yesterday’s 3pm closing levels.  Several big corporate bonds may have added some pressure.  We can also consider that US bonds already had a fairly big rally after the Fed yesterday.  But the simplest view would be that it didn’t make sense to get too carried away with the jobs report on deck in the morning.

Econ Data / Events

Jobless Claims

183 vs 200 f’cast,186k prev

Unit Labor Costs, Q4

1.1 vs 1.5 f’cast, 2.0 prev

Market Movement Recap

09:05 AM Flat to slightly stronger overnight.  Additional gains after ECB announcement.  10yr down 8bps at 3.34%.  MBS up 3/8ths of a point

12:51 PM Largely sideways during the domestic session, but off the best levels from earlier this morning.  10yr down 3.8bps at 3.376.  MBS up 6 ticks (.19) in 4.5 coupons and 3 ticks (0.09) in 5.0 coupons.

01:51 PM Weakest levels of the day in Treasuries with 10yr up to 3.404 (still down 1.3bps on the day).  MBS are also still slightly stronger, but more than a quarter point off the highs.

03:18 PM Not much additional weakness over the past hour.  Still slightly stronger on the day but near the weakest levels of the day.

Mortgage rates responded favorably to yesterday’s press conference with Fed Chair Powell.  We discussed that move in detail in yesterday’s commentary: Fed Hikes Rates. Mortgage Rates Drop. Here’s How That Works. Now today, the average lender improved just a bit more as the Fed’s European counterpart released its latest policy announcement.  Like the Fed, the European Central Bank (ECB) hiked rates at the same pace expected by markets but delivered comments that left the bond market feeling more upbeat. In the case of the ECB announcement, it was logically the European bond market that felt more upbeat.  But there’s a certain amount of interconnectedness among the world’s leading markets, so it’s common to see spillover into US rates when something is pushing EU rates lower.   Given that US rates already experienced a fairly large move yesterday, they were somewhat resistant to the idea of going on a wild road trip toward even lower levels with their crazy European friends.  US rates were nonetheless on that trip just long enough for the average 30yr fixed rate quote to touch 5.99% for top tier scenarios.  For all practical purposes, that means mortgage rates are basically at 6% with some lenders quoting slightly lower and a few more lenders quoting slightly higher. Friday morning brings the important jobs report which has the power to push rates quickly higher or lower depending on the outcome of the data.

Today’s big story is the European bond market’s reaction to the European Central Bank (ECB) announcement.  The hike was as-expected, but the ECB also said the next rate hike is already locked in for March at which point it will reevaluate.  That reevaluation means a pivot toward smaller rate hikes followed by a pivot to no rate hikes.  And if you ask markets, there will then be a pivot to rate cuts as early as Q4 2023.  Traders see the pre-commitment for March’s hike as evidence that the dovish shift has begun.  The result is a massive rally in EU bonds–far too big for US bonds to try to match.  In fact, 10yr yields are rallying at a mere quarter of the EU 10yr pace.
The caveat is that US 10s got in quite a bit of rallying yesterday while EU bonds were already done for the day.  If we use the same 30bps of y-axis range for both, the net effect is only slightly lopsided in EU bonds’ favor.

The gains mean the prevailing range (which had bottomed out at 3.40-3.42) has been broken yet again.  This happened a few weeks ago as well, but it didn’t stick.  Things look more serious this time, so it makes sense to consider subsequent technical targets.  3.31 jumps off the page as the absolute intraday low from January 19th.  

3.25 gets the nod, and probably always will, due to its role as a ceiling level in late 2018. 

Happy Groundhog Day, where the rodent saw its shadow this morning, so plan on six more weeks of winter. There’s an old Yiddish proverb “We plan, God laughs.” Lots of people plan on owning a home, and will need financing. (Today’s podcast features an interview with homeowner Riley Howard about his decision why he refinanced his primary mortgage rate four times, and how he chose his lender(s).) Plenty of lenders are planning on being around to help do the estimated $2 trillion in home loans this year. Plenty of people had planned on the Federal Reserve’s Open Market Committee (FOMC) bumping up overnight rates by .25 percent (25 basis points) yesterday, and sure enough it happened. But rates dropped anyway, despite the planning and expectations, and if you want a primer on why, here you go. (Today’s podcast can be found here and this week’s is sponsored by Milestones. Giving homeowners an all-inclusive homeownership experience including home value and equity monitoring, home maintenance reminders and how-to articles, cloud-based document storage, one-click access to hire professionals for various projects around the home, and much more.) TPO Loan Products Are you looking for new ideas, products, tech solutions and training to win more purchase business? Join Rocket Pro TPO next Monday (2/6) at 2pm ET for the next IGNITE Live meeting! Register here! This monthly meeting, hosted by Executive Vice President, Mike Fawaz, is designed to deliver new and special announcements plus insights and solutions for the broker community. February’s meeting will showcase how VA lending can be a big part of your purchase strategy in 2023. Want to exceed the expectations of buyers and sellers? Rocket Pro TPO will cover virtually all of VA’s non-allowable fees: That’s Fee Freedom for VA! If you missed the last IGNITE Live, where Fawaz introduced free credit reports for brokers, watch the replay! See you next Monday for another big announcement!