Lower inflation and a slowing jobs market is the driver of the new forecast, but housing will not see any immediate benefits.

Afternoon Weakness For Longer-Term Bonds. Are MBS in That Category?

It’s easy to throw around general categories when discussing the bond market such as “longer” and “shorter” term (also seen as longer and shorter ends of the yield curve). But where is the cut off?  In general, the current crop of MBS being produced to cover new mortgage originations is actually somewhere in the middle of the pack (i.e. the belly of the curve). That’s because the average newly-originated mortgage is not expected to last nearly as long as the 10yr Treasury note that often serves as a basis for comparison. Who cares?  Not us, usually.  It only matters on days where long and short term rates are doing noticeably different things. In today’s case, that provided some small benefit to MBS when compared to the 10yr.

Econ Data / Events

Existing Home Sales

3.89m vs 4m f’cast, 4.11m prev

Market Movement Recap

10:09 AM modestly stronger overnight and sideways so far.  MBS up 3 ticks (.09) and 10yr down 2.4bps at 4.228.

01:01 PM still sideways ahead of 2yr Treasury auction.  10yr down 2.4bps at 4.22.  MBS up 3 ticks (.09).

03:58 PM Near weakest levels, but in a narrow range.  MBS up 1 tick (.03) and 10yr down only 0.4bps at 4.249

Spats of volatility in the mortgage rate world seem to last only a matter of hours recently and to occur only a few times on any given month.  The rest of the time is spent drifting mostly sideways waiting for the next big shoe to drop. We’ve been decisively locked in one of those “drifting” moments for almost 2 weeks now with the last big move seen in response to the inflation data that came out on the morning of June 11th.  The average top tier 30yr fixed rate has been in the 6.8s ever since. Today’s change was minimal with many lenders effectively unchanged compared to yesterday morning’s offerings.  Some lenders made adjustments toward higher rates yesterday afternoon in response to market weakness, and are now back down in line with averages.  When will the sideways drift change?  Volatility has most reliably followed one of several of the most important economic reports.  None of those reports are coming out this week, but there are a few solid supporting actors that will begin hitting the wires tomorrow morning (specifically, S&P Global’s manufacturing and service sector indices).  This won’t singlehandedly change the outlook for rates, but it may cause slightly bigger movement between now and the first two weeks of August, when the big ticket data actually arrives.

Existing home sales fell in June, but the median sales price hit a record high as it had also done in May . The National Association of Realtors® said sales of previously owned single-family houses, townhouses, condominiums, and cooperative apartments receded by 5.4 percent compared both to May and sales in June 2023. Total sales were at a seasonally adjusted annual rate of 3.89 million units. Annual sales in the two earlier periods were at the rate of 4.11 million. Single-family home sales dropped 5.1 percent from May to a rate of 3.52 million in June and were 4.3 percent lower than a year earlier. The annual rate of existing condominium and co-op sales, estimated at 370,000 units, was 7.5 percent lower than the May number and 14 percent below the 430,000 sales posted a year earlier. [existinghomesdata] Home sales just missed the bottom of the range of forecasts from analysts polled by Econoday. Those estimates ranged from 3.90 million to 4.25 million with a consensus of 4.0 million. “We’re seeing a slow shift from a seller’s market to a buyer’s market, ” said NAR Chief Economist Lawrence Yun. “Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis.” Clearly, the shift to a buyers‘ market is not yet complete as prices continue to rise. The median sales price for all housing types in June was $426,900, an all-time high and an increase of 4.1 percent from the June 2023 median of $410,100. Single-family home prices were also up 4.1 percent to $432,700. The increase in condo prices was more modest, 2.6 percent, resulting in a median of $371,700. [existinghomeprices]

Before President Biden quit his reelection bid, markets had been pricing in a “Trump Trade.” This meant investors placing bets on a steeper yield curve and placing money into stock sectors that were most likely to benefit from a Trump Presidency. That certainly has slowed in the last 48 hours, though I would caution against jumping to conclusions about the path ahead, especially when it comes to the mortgage sector. The FOMC is still expected to cut the federal funds rate by 25 basis points at its September meeting followed by another 25 basis points rate cut in December, with more cuts to come in 2025, but that doesn’t necessarily mean that mortgage rates will decline. It’s already been priced in, so only the disappointment of investors’ hopes for easy money being dashed would hurt markets most. VP Harris sealed her status as the presumptive nominee yesterday after securing the support from more than enough delegates and raising a record-breaking haul of donations during her first day as a candidate. Speaking of Californians that no longer reside there, today, I am back in California. Oh wait, that’s something Rob would say when he writes these opening paragraphs. Over the past couple of weeks with him on vacation (odd for him to not share his travel plans with you), I (Robbie, writing to you from the top of Mosquito Pass today via the wonders of modern technology) have had the pleasure of writing the daily commentary in its entirety. Much more work than the capital markets section that I have been writing for the past 15+ years. Some minor changes you may have noticed are a preview of what is to come. We have some big plans for media expansion here that I’m looking forward to sharing with you in the coming days and weeks. Stay tuned! (Today’s podcast is found here and is sponsored by LoanCare, known for delivering superior customer experience as a mortgage subservicer through personalization and convenience, supporting MSR investors with a focus on customer engagement, liquidity, and credit risk. Today’s episode features an interview with LoanCare’s David Vida on servicing beyond expectations.)

This morning’s market movement continues to build a case against yesterday’s mid-day sell-off being serious and purposeful.  Bonds have continued to rally back gradually since topping out just before 1pm.  The gains mean we’re starting the day right in line with yesterday’s opening levels in MBS and, more importantly, not reading anything into any of the movement over the past week and a half.  

Today’s only potentially significant scheduled event for the bond market is the 1pm auction of 2yr Treasuries, and that’s a long shot.  2yr auctions tend to have no impact on longer term rates, but there are one or two exceptions over the past few years.  Even then, those exceptions haven’t ever redefined a near-term trend.  On that topic, big moves in either direction continue to depend on big ticket data.

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