Mortgage rates hit their highest level in just over 3 months yesterday with financial markets generally protesting the absence of more serious spending cuts in the spending bill.  Rates care about fiscal spending because higher spending requires higher Treasury issuance which, in turn, pushes rates higher, all else equal. Although the House passed the bill early this morning, financial markets were already fairly well braced for the impact. Now that the Senate is saying the bill likely won’t reach the President’s desk until late Summer, markets are able to pause and reflect.  One conclusion that some investors are coming to is that yields on US Treasuries are increasingly attractive as they move up through the 4% range (and in the case of 30yr bonds, the 5% range). When investors buy more bonds, it puts downward pressure on rates. As far as today was concerned, it didn’t amount to much in terms of movement versus yesterday. The average lender is just a hair lower, but still over 7% for top tier 30yr fixed scenarios.

Slightly Stronger Because Not Every Day Can be Weaker

Bond yields have moved almost exclusively higher in May. At the very least, they’ve been in an incredibly linear uptrend.  Uptrends wouldn’t last very long if there wasn’t some push and pull (think 2 steps forward, 1 step back).  And that brings us to the best case for today’s gains: sellers are taking a breath.  Not every day can be a sell-off.  To be sure, the gains weren’t inspired by data or any new fiscal developments. We can attempt to force the mid-day pop to fit a fiscal narrative based on a comment on the Senate’s time frame for a vote, but we could just as easily say it was position-squaring ahead of a holiday weekend with traders leaving at lunch time today and not coming back until the middle of next week.

Econ Data / Events

Jobless Claims

227k vs 230k f’cast, 229k prev

Continued Claims

1903k vs 1890k f’cast, 1867k prev

S&P Services PMI

52.3 vs 50.8 f’cast, 50.8 prev

S&P Manufacturing PMI

52.3 vs 50.1 f’cast, 50.2 prev

Market Movement Recap

09:25 AM modestly weaker after spending bill passage, but back to unchanged in MBS now.  10yr down 1.3bps at 4.588

12:19 PM Nice rebound, perhaps on news that spending bill could take all summer.  MBS up 6 ticks (.19) and 10yr down 6bps at 4.542

04:27 PM Heading out near best levels with 10yr down 6.3bps at 4.538 and MBS up nearly a quarter point.

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.

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.