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Mid-Day Mystery Move But no Impact on Bigger Picture

The most notable development in the bond market today was the fairly abrupt (but still small-scale) sell off that took place between 11:20am and noon ET.  Oftentimes, there are at least a few reasonable options to serve as scapegoats for otherwise inexplicable market movement, but that’s arguably not the case this time around.  Is it political? If so, why did the market wait until 11:20am?  Is it related to other markets?  Stocks also sold off at the time, but they rallied back whereas bonds did not.  Europe?  The timing lines up, but the move in US bonds was bigger (the opposite of what a European influence would suggest).  Ultimately, the incredibly low volumes and range-contained losses mean we don’t have to agonize over this one.

Market Movement Recap

11:30 AM Slightly stronger overnight but giving up some gains in the past few minutes.  10yr up 0.4bps at 4.242.  MBS roughly unchanged.

01:25 PM weakest levels of the day just before 1pm.  MBS down 3 ticks (.09) and 10yr up 2.6bps at 4.264

04:20 PM MBS back to unchanged and 10yr up 1.8bps at 4.256

Mortgage rates rose at a moderately quick pace on Friday, partially in response bond market weakness on Thursday afternoon that happened too late in the day for many lenders to update their offerings.  To be fair, it was only “moderately quick” relative to the subdued volatility seen during the rest of the week.   The new week is off to the same sort of subdued start with the average lender holding right in line with the levels seen on Friday.  Political developments over the weekend had no discernible impact on the rate landscape in the short term, no matter how often claims to the contrary might be repeated. Unfortunately, there was a certain amount of mid day volatility in the bond market that lacked an obvious explanation.  Because political events were the most notable headlines of the day, they have been mistakenly linked to the bond market movement–even by respectable news organizations.   All of the above is neither here nor there on a day where 10yr Treasury yields are less than 0.02% higher than Friday and where mortgage rates are perfectly unchanged.  The 2nd half of the week brings greater risks of volatility following Treasury auctions and scheduled economic data.

No way, President Biden decided to drop out of the presidential race on National Ice Cream Day! The markets (take your pick… stock, bond, currency, whatever) don’t like uncertainty. Fixed-income markets, including those that involve mortgage-backed securities, generally sell off price-wise and go up rate-wise with uncertainty. With President Joe Biden announcing that he will not run for re-election in November, there is added uncertainty. Kamala Harris is not a shoo-in to be the nominee although, as of this writing, other Democrats are coming out saying they will not challenge her. And of course, the VP role is anyone’s guess. Financial analysts are scrambling to look at Harris’ history in terms of being anti-corporate, pro-regulation, and so on. None of this really helps borrowers anywhere, and, in fact, much of it increases the cost of residential lending. But while the GOP has been trying to blame the Biden administration for residual inflation, it’s Trump’s plans (another round of tax cuts Democrats say will go to the rich, across-the-board tariff hikes to trigger another China trade war, and curbs on immigration that Republicans blocked earlier this year) that economists are warning will wreak havoc on global trade and send inflation right back up again. That’s a lot of headline risk, regardless of who wins in November. We still have over three months until the actual election, and we can expect even less being done legislatively in Washington D.C. Meanwhile, all lenders and vendors are just trying to do their jobs and help their borrowers. (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 InterLinc Mortgage’s Erin Dee on the roles and responsibilities of a Chief Operating Officer at a mortgage company.)

If there was any remaining doubt that recent political headlines were given too much credit for impacting the bond market, it was removed late Sunday night.  When Treasury trading began for the week, investors finally had a chance to react to the first non-speculative major development in the Trump vs Biden election odds debate–the one that kicked into high gear after the presidential debate.  
This is the moment of the week that has historically seen big gluts of volume and volatility when over-the-weekend events are truly newsworthy.  In the current case, there was no volume whatsoever and yields are opening inside the same trading range from last week.  Contrast that to July 15th, when there arguably was a reaction to the assassination attempt over the weekend.

To be fair, there were credible headlines on Friday afternoon that suggested a distinct possibility of Biden’s Sunday announcement, but even so, the market would never fully trade such news until it was confirmed. 

The former president’s running mate pick has garnered national attention, partially for his controversial suggestion to deport 20 million people as a solution to the lack of housing inventory.

Both Vanguard Group Inc. and Fidelity International have said a Republican sweep in November would pose the greatest risk to bonds by expanding Trump’s ability to implement his agenda, some of which is also expected to contribute to higher inflation.

Vice President Kamala Harris, the most likely choice to replace President Joe Biden on top of the Democratic presidential ticket in November, has a long and complicated history with the banking industry.

Investors are set to start the week scrambling to decide if President Joe Biden’s decision to end his reelection campaign and endorse Vice President Kamala Harris increases or decreases Donald Trump’s chances of regaining power.

The Department of Housing and Urban Development and the Nationwide Multistate Licensing System also reportedly had disruptions.