Nice Tuesday For Bonds, But It’s All About Wednesday

Tuesday turned out to be great for bonds with MBS up nearly a quarter of a point for most of the day and 10yr yields ultimately dropping into the 4.35’s by the final hour of trading.  As nice as it is to see a rally these days, it’s best thought of as an isolated, random victory without any bearing on the bigger picture.  Granted, we may be seeing some evidence of “value buying” with yields getting near 4.5% on Monday, but Wednesday’s CPI would still need to cooperate in order to confirm that hypothesis.  To be clear, there is no way to know whether CPI will do that.  It’s just another coin flip in the game of helping or hurting rates, but on a much bigger scale than the average economic report.

Econ Data / Events

Nonfarm Payrolls

303k vs 200k f’cast, 270k prev

Unemployment Rate

3.8 vs 3.9 f’cast, 3.9 prev

Earnings

0.3 vs 0.3 f’cast, 0.2 prev (revised up 0.1)

Market Movement Recap

08:05 AM Steadily stronger overnight.  10yr down 4.6 bps at 4.381 and MBS up 6 ticks (.19)

10:00 AM Fairly flat in the first two hours.  MBS up 7 ticks (.23) and 10yr down 5bps at 4.377

01:07 PM Modest selling in Treasuries after the auction, but nothing serious.  10yr down 4.8bps at 4.553.  MBS up 6 ticks (.19).

04:07 PM Sideways all afternoon, but modest gains in the past few minutes.  MBS up a quarter point.  10yr down 7.2bps at 4.356

Mortgage rates roughly matched their highest levels in months yesterday, but managed to turn things around today.  One could argue that the broader bond market (which dictates rates) began to turn things yesterday morning and that the only reason rates moved higher was the overnight bond market movement.   So today was either a new recovery or a continuation of yesterday’s recovery, but none of that matters now.  Wherever we may be this afternoon, we may be somewhere completely different tomorrow afternoon.  While that’s true every day the market is open, it’s a much bigger version of true today. Why? Tomorrow morning marks the release of the Consumer Price Index (CPI).  Of all the monthly economic reports, this one has the most potential to cause volatility for rates.   Is volatility bad or good?   It’s important to understand that volatility is a two way street.  A very low reading on CPI would likely push rates much lower while a very high reading would do the opposite.  Additionally, it is also possible for the data to thread the needle and leave rates roughly unchanged, but the point is that the range of potential outcomes is much wider than normal.

Here in the Hill Country near Austin, Texas, there’s an active market of sellers and buyers of real estate. It is a safe bet that most use agents; around 90 percent of buyers use them, and Clever released data on average real estate commission rates in the U.S. as they stand now. Clever found that on the median-priced home of $431,000, the average U.S. home seller pays real estate commission fees of about $23,662. In a survey of 630 partner agents, the average real estate commission rate in the U.S. is 5.49 percent, divided between the listing agent (2.83 percent) and the buyer’s agent (2.66 percent). The average commission rate rose from 5.37 percent in 2023. Most real estate agents typically work within a range of 2.5 percent to 3 percent. Several key factors influence this, such as property value, client relationship & circumstances, sale complexity, services provided, and market conditions. Hawaii is home to the lowest average real estate commission rate (4.78 percent), while West Virginia has the highest (6.67 percent). (Found here after 8:30AM ET, this week’s podcasts are sponsored by PHH Mortgage. From subservicing to correspondent lending, MSR/co-issue transactions, portfolio retention, reverse mortgages, and commercial servicing, PHH has solutions for the entire mortgage lifecycle. Hear an interview with Cross Country Mortgage’s Nicole Perrone on ways lenders are expanding production and capturing market share.) Lender and Broker Products, Software, and Services

The overnight session was generally a mirror image of yesterday’s with 10yr yields moving several bps lower in a linear, steady trend.  Unlike yesterday, 8am didn’t bring an obvious reversal.  

While this stronger start is “nice,” it’s meaningless in the bigger picture.  Apart from a truly astonishing surprise, nothing about today can change the fact that bonds are roughly in line with their weakest levels in months ahead of a CPI report that will either result in more weakness or a decent bounce. And EVEN THEN, it may not be enough to coax yields outside the boundary of 2024’s linear uptrend.  The outer lines in the chart below (2 standard deviations away from a linear regression) are at roughly 4.53 and 4.18.  It would take a big reaction to CPI to get to either boundary.

Today’s 3yr Treasury auction is the only calendar item of note (pun intended).  It’s capable of introducing some noise in the afternoon, but not much.

The new expiration for waivers, which is now set for a date after November, adds uncertainty about the fate of a proposed policy that would replace the temporary, pandemic-era servicing rules.

UWM’s CEO Mat Ishbia says the Hunterbrook story, which claims his company committed several serious violations, was funded by Rocket. Rocket denies the allegations.

The appellate court decision allowing the Justice Department to reopen an investigation into the National Association of Realtors is likely to disrupt the Sitzer/Burnett settlement, Keefe, Bruyette & Woods said.

The top five states have an average effective real-estate tax rate of 2.02%

The surprisingly strong U.S. economy has driven Treasury yields to the highest since late November as investors dial back bets on interest-rate cuts, wagering that policymakers will be wary of easing policy prematurely.

Uneventful, Sideways Day After Initial Losses

Today had the dubious distinction of seeing the highest yields in more than 4 months while also being uneventful and largely sideways in terms of bond market momentum.  The steeper losses were limited to the overnight session with 8am bringing a quick but shallow correction.  Bonds were back to levels that would only be considered modestly weaker by 10am and the rest of the day was spent drifting sideways in the same territory.  There were no standout market movers, news headlines, or Fed comments.

Econ Data / Events

Nonfarm Payrolls

303k vs 200k f’cast, 270k prev

Unemployment Rate

3.8 vs 3.9 f’cast, 3.9 prev

Earnings

0.3 vs 0.3 f’cast, 0.2 prev (revised up 0.1)

Market Movement Recap

09:33 AM Follow-through selling overnight with 10s opening as high as 4.463.  Now up only 2.5bps at 4.427.  MBS down an eighth after opening down more than a quarter point.

11:51 AM Rally stalled.  MBS an eighth off highs and 6 ticks (.19) lower day over day.  10yr down 2.4bps at 4.425

02:18 PM bouncing back a bit heading into the 2pm hour.  MBS down only an eighth.  10yr up 1.1bps at 4.413

04:28 PM Gliding flat into the 5pm close.  MBS still down an eighth.  10yr up 1.9 bps at 4.421.