Deep Dive on Today’s Misunderstood Fed Comments

Today’s only potential big ticket event was the release of the minutes from the Fed’s most recent meeting (3 weeks ago). These weren’t very likely to cause a stir, but an odd inclusion caught the market’s attention. In not so many words, it had to do with the potential for the Fed to pause its balance sheet run-off (something that would technically create net buying demand in bonds) in order to maintain enough of a balance sheet cushion to accommodate volatility associated with Treasury’s account balance in the run up to the next debt ceiling showdown. While nothing has been decided yet, and while it would only be temporary, some traders viewed it as a short term opportunity and acted accordingly (by buying a few more bonds today). 

Econ Data / Events

NY Fed Manufacturing 

5.7 vs -1.0 f’cast, -12.6 prev

NAHB Housing Market Index

42 vs 47 f’cast, 47 prev

Market Movement Recap

11:17 AM Weaker overnight but bouncing back into positive territory in early trading.  MBS up 2 ticks (.06) and 10yr down 0.1bps at 4.542

03:39 PM Zero reaction to Fed minutes at first, but then some buying owing to the notion of pausing balance sheet run-off pending further clarity on the debt ceiling. MBS up 6 ticks (.19) and 10yr down 2.2bps at 4.53

Bonds extended yesterday’s selling streak in the overnight session, but not in an alarming or serious way. Momentum reversed at 9am without any clear catalyst apart from the technical ceiling at 4.57% in 10yr yields.  Yields have dropped a few bps since then to return to just-barely-stronger levels. The day’s only notable calendar event is the release of FOMC Minutes at 2pm.  Not to be confused with an actual Fed day, the minutes are simply a more detailed account of the Fed day 3 weeks ago. They can occasionally offer market-moving revelations, but it’s hard to imagine what they could convey in the present environment that hasn’t already been widely discussed by Powell and other speakers over the past 3 weeks.

So, you drive across town to a gym to walk on a treadmill? There are always interesting and strange things going on out there. Huh? The Florida’s governor wants to eliminate property tax? Yes, the state currently runs a budget surplus, but with no income tax, and no property tax… Huh? KFC is leaving Kentucky for Texas?! Yup. Huh? HUD is cutting 50 percent of its workforce? Join the crowd. Huh? Totally freezing the CFPB in place would mean that all of Cordray’s and Chopra’s work will be frozen in place, right? Even my cat Myrtle would have known that and warned against a total freeze. Of course we have the report/letter that the CFPB sent to all of the states about being more aggressive in enforcing consumer financial protection laws. Most lenders adhered to rules and regulations before the CFPB came along. Most. Huh? Homeowner’s insurance in some areas is more expensive than principal and interest? Yup. “Rob, have you heard that lenders are actually watching the ratings of insurance companies, and may go to borrowers saying ratings have dropped, and requesting the borrower obtain new insurance or else…” Yes, I have. (Today’s podcast can be found here and this week’s is sponsored by nCino. nCino Mortgage Suite’s three core products, nCino Mortgage, nCino Incentive Compensation, and nCino Mortgage Analytics, unite the people, systems, and stages of the mortgage process. Hear Part two of an interview with Rocket’s Bill Emerson, with questions provided by the Institutional Risk Analyst’s Chris Whalen, on the lending landscape in the digital age of mortgage.)

The new tool taps into Intercontinental Exchange’s AllRegs database, which contains over a million pages of guidelines from various sources.

The government guarantor saw close to 25% of probationary employees cut.

Builder confidence had surged following Trump’s election win but home financing costs stuck around 7% in recent months have sapped demand and sent builder stocks tumbling.

Federal Reserve Gov. Michelle Bowman — who is viewed as a leading contender to be the next vice chair for supervision at the central bank — said changes to the post-financial crisis framework should be a focal point of the Fed’s regulatory policy review.

More government-backed loans shifted out of forbearance, while the share of portfolio and private-label securities loans remained flat from December.

Bonds Give Up Friday’s Gains

Bond market volume was a little better than half of its recent average today–something that’s not  shocking to see on the return from a 3 day weekend without any big ticket economic data. Overseas markets contributed to a weaker bias out of the gate, and while that stabilized in early U.S. trading, selling was slow, steady, and linear from 11am through the close.  With that, yields find themselves back in the range that has contained a majority of the trading of the past 3 weeks (4.50 to 4.57).

Econ Data / Events

NY Fed Manufacturing 

5.7 vs -1.0 f’cast, -12.6 prev

NAHB Housing Market Index

42 vs 47 f’cast, 47 prev

Market Movement Recap

09:11 AM Moderately weaker overnight with MBS down 6 ticks (.19) and 10yr up 4.4bps at 4.52

01:08 PM 10yr up 6 bps at 4.536.  MBS down 6 ticks (.16)

03:02 PM 10yr yields are up 6.7 bps at 4.543 and MBS down roughly 1/8th from highs (quarter point on the day).

Mortgage lenders were unable to update their rates yesterday as the bond market was closed for the Presidents Day holiday.  Three day weekends can occasionally result in extra volatility on the first day of the new week because–in many cases–the rest of the world’s financial markets continue moving. This leaves the US bond market (which is responsible for dictating interest rates) with the need to cover 2 days worth of ground.  In today’s case, that ground led toward higher rates both yesterday and today. The net effect was a return to the rates just a hair below those seen last Thursday, thus erasing most of Friday’s gains.  The silver lining is that Thursday’s rates were already near the lowest in just under 2 months.