Treasury Auction Blamed as Bond Vigilantes’ Smoking Gun

Vigilante justice!  Taking matters into one’s own hands!  It’s a sensational concept when applied to the bond market, but the term hasn’t really done us many favors over the years.  It happened to work for a headline today because the term is as over-the-top as the notion that today’s 20yr auction was some magical “ah ha” moment leading to a massive reprimand of congressional budget negotiations in both stocks and bonds. In actuality, the auction was fairly average–certainly nothing that warranted the stock/bond swoon, but if markets were looking for an excuse to sell (a smoking gun?), it was one of the only options. 

Market Movement Recap

09:21 AM weaker overnight amid ongoing budget battle. MBS down just over a quarter point and 10yr up 5.3bps at 4.541

01:04 PM A bit weaker after 20yr auction.  10yr up 6.5bps at 4.553 and MBS down nearly 3/8ths.

02:37 PM Additional selling in both stocks and bonds.  MBS down half a point and 10yr up 9.4bps at 4.582.  Weakness looks to have stabilized for now though.

As nearly a thousand capital markets staff, managers, and vendors head home from Manhattan, united in trying to help borrowers, in a reflection of the times, it’s interesting how divisive the times are given the phone call this week between Vladimir Putin and Donald Trump. Fox News noted, “Trump Confident Putin Wants Peace” versus nearly every other publication who wrote things like “Trump Hands Putin Win.” I mention this as it relates to the economy and mortgage rates, are there two ways to look at a rating cut? No one disagrees with the fact that the United States no longer holds a perfect credit rating with any of the three major agencies. Now we’re “behind” countries like Canada (51st state?), Australia, Denmark (owner of Greenland), Germany, even Liechtenstein. Does anyone care? Lenders will certainly care if it impacts U.S Treasury rates as the risk on these securities is a notch higher, which in turn impact mortgage rates (which are usually priced as a spread to Treasuries) and in turn impact borrowers. To put a positive spin on this, if there is one, the rating agency change was expected and already in the market. Nonetheless, if the Administration continues to move the dollar away from being the world’s reserve currency, we can expect more worldwide consequences, and perhaps not in favor of our borrowers. (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 Optimal Blue’s Mike Vough on ways technology is advancing the pricing and hedging space, specifically the granularity of pricing and timing of transactions, as well as how it can help companies save money from the beginning of the origination process.)

We’re now into the 3rd day of a week that’s conspicuously lacking in relevant econ data. In addition, the looming holiday weekend hinders participation and increases potential volatility. That means an extra level of impact for whatever bonds can find to move the needle. So far, all they’ve been finding is a feeling of disillusionment with the fiscal outlook as they watch congress debate spending more money on one thing vs spending more money on another thing.  Insultingly, those things are in the spotlight more for political strategy reasons than for their central role in our current fiscal spiral. So not only are we not addressing the spiral with any of the available options, we’re also highlighting the worst features of our legislative process.
While all of the above has bonds under pressure overnight, it’s worth noting that yields continue to operate in the same short-term range since the beginning of last week. That range was entered due to the US/China tariff pause.  Fiscal disillusionment is merely the factor pushing yields toward the top of that range.

In remarks at a Mortgage Bankers Association conference, the trade group’s CEO also acknowledged the need for some guardrails to remain in place.

Starting with the client for life concept, executives from Rocket and CMG Financial described what is happening at their nonbanks to achieve future success.

An explicit guarantee for Fannie Mae and Freddie Mac could cause the risk weighting of agency MBS to decline, in turn freeing up banks’ balance sheets.

The size of typical bulk MSR deals trading has shrunk, according to panelists at the Mortgage Bankers Association’s Secondary and Capital Markets Conference.

Discrepancies between servicer and investor systems have been rare recently but the dollar amounts involved magnify the impact, according to PMSI’s CEO.

Ultimately Sort of Flat if You Use Your Imagination

Here’s a quick and easy method for imagining that bonds were flat today. Step one, go back to yesterday and use 3pm as a closing time (not a crazy request considering that’s the traditional end-of-day marking time for Treasuries). Then do the same for today. The result is that 10yr yields are up about half a bp. Feel free to round that down to 0bps, and voila! Flat day.  That assessment actually fits better with the calendar and the general vibe. AM volatility came and went surrounding budget headlines and bonds are once again flirting with 4.5% 10yr yields on a holiday-shortened, mostly data-free week, waiting for the next shoe to drop.

Market Movement Recap

10:47 AM Modestly weaker overnight with additional selling in the first 2 hours.  MBS down 5 ticks (.16) and 10yr up 4.2bps at 4.492

01:53 PM Decent recovery with MBS down only 3 ticks (.09) and 10yr up 2.7bps at 4.478

04:47 PM Heading out in moderately weaker territory, but in line with y’day’s mid day levels. MBS down 6 ticks (.16) and 10yr up 3.3bs at 4.483

Rocket Companies and Redfin argue in court filings that a lawsuit seeking to delay their merger is motivated by the plaintiff’s personal gain, not concern for investors.