This morning’s market movement continues to build a case against yesterday’s mid-day sell-off being serious and purposeful.  Bonds have continued to rally back gradually since topping out just before 1pm.  The gains mean we’re starting the day right in line with yesterday’s opening levels in MBS and, more importantly, not reading anything into any of the movement over the past week and a half.  

Today’s only potentially significant scheduled event for the bond market is the 1pm auction of 2yr Treasuries, and that’s a long shot.  2yr auctions tend to have no impact on longer term rates, but there are one or two exceptions over the past few years.  Even then, those exceptions haven’t ever redefined a near-term trend.  On that topic, big moves in either direction continue to depend on big ticket data.

Before President Biden quit his reelection bid, markets had been pricing in a “Trump Trade.” This meant investors placing bets on a steeper yield curve and placing money into stock sectors that were most likely to benefit from a Trump Presidency. That certainly has slowed in the last 48 hours, though I would caution against jumping to conclusions about the path ahead, especially when it comes to the mortgage sector. The FOMC is still expected to cut the federal funds rate by 25 basis points at its September meeting followed by another 25 basis points rate cut in December, with more cuts to come in 2025, but that doesn’t necessarily mean that mortgage rates will decline. It’s already been priced in, so only the disappointment of investors’ hopes for easy money being dashed would hurt markets most. VP Harris sealed her status as the presumptive nominee yesterday after securing the support from more than enough delegates and raising a record-breaking haul of donations during her first day as a candidate. Speaking of Californians that no longer reside there, today, I am back in California. Oh wait, that’s something Rob would say when he writes these opening paragraphs. Over the past couple of weeks with him on vacation (odd for him to not share his travel plans with you), I (Robbie, writing to you from the top of Mosquito Pass today via the wonders of modern technology) have had the pleasure of writing the daily commentary in its entirety. Much more work than the capital markets section that I have been writing for the past 15+ years. Some minor changes you may have noticed are a preview of what is to come. We have some big plans for media expansion here that I’m looking forward to sharing with you in the coming days and weeks. Stay tuned! (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 LoanCare’s David Vida on servicing beyond expectations.)

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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

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.)

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.