Super Duper Flat After Overnight Losses

In a vacuum limited to this week, Friday ended up being the only interesting day because it was the only outlier in terms of bond market price action.  On the previous 4 days, the highest MBS price was within a 0.09 range and the lowest price was within a 0.06 range. Lastly, the widest high/low range of the week was about a quarter point.  If you’re not sure what to make of that, it means Mon-Thu were flat.  Friday was flat too, but only after overnight losses took MBS prices almost a half point below Thursday’s highs.  In the bigger picture, this still isn’t that significant–especially considering these levels would still be the best in several months before last Thursday’s friendly CPI data.

Market Movement Recap

10:03 AM Weaker overnight with additional selling early.  10yr up 4.2bps at 4.242.  MBS down 6 ticks (.19).

01:04 PM sideways near weakest levels.  MBS down 5 ticks (.16) and 10yr up 3.4bps at 4.236

03:45 PM Zero change since last update.  Very flat in general since the AM hours and even flatter in the PM hours. 

I get asked if I think our industry puts too much emphasis on what the Federal Reserve is doing, and its being able to control inflation. In a word, my answer is yes. The Fed has a hand in inflation, but it isn’t the whole story. A President cuts off immigrants, so labor costs for picking lettuce or building a house go up. A ship carrying a load of raw materials from Africa is taken over by pirates, or gets stuck due to a port strike in a foreign nation. Tariffs are implemented, raising the prices since average consumers pay entirely for higher tariffs. Crops like corn or oats have a bad year. On and on. For the past two years, inflation has eclipsed everything else at the Fed. U.S. central bankers appear ready to cut interest rates in September amid monthly price numbers continuing to trend down toward the Fed’s 2 percent target and Chair Powell will likely flag a cut more explicitly after a policy meeting at the end of this month. The Fed signaling that interest rate cuts are approaching could help a homebuilding recovery that has been stuck in low gear due to high interest rates. For those out there hoping for lower mortgage rates, I would ask you what will lower rates do to housing prices, especially houses in the first-time home buyer sector? (Today’s podcast is found here and is sponsored by Calque. Calque provides a binding backup offer on a borrower’s departing residence, which empowers lenders to provide a bridge-like experience with easier qualification and less risk. Today’s episode features an interview with Figure’s Jackie Frommer on tappable home equity and products to help borrowers leverage it.)

While there was never much of a chance of mortgage rates moving above the levels seen at the beginning of last week, they were easily able to nab the dubious distinction of hitting this week’s highest levels today. This is the least surprising thing imaginable after looking at this week’s chart of mortgage-backed securities prices. As the caption advises, the lower the line, the higher the implication for mortgage rates.  The weakness was already in the works as of yesterday afternoon, but the market deteriorated further overnight and in the early morning hours for reasons that are esoteric as they are inconsequential.  In the bigger picture, apart from the past 5 days, we’re still at the lowest levels in 6 months and we’re still waiting for only a few key economic reports to set the tone for rates going forward. 

This week’s bond rally hit a wall at the 3pm close on Wednesday.  There’s been gradual upward pressure since then with today’s overnight session seeing some of the fastest selling. 

The counterpoint is that the selling is only fast relative to the recent range.  It’s very mild in the bigger picture with 10yr yields only being up about 4bps.

As for motivations, declining volumes have greased the skids for any material market movers to have a bigger impact than they otherwise might.  One of the only quantifiable market movers has been the heavy slate of corporate bond issuance this week with nearly $50bln brought to market versus expectations for roughly $34bln according to BMO.
For more on how corporate issuance impacts other bonds, check out our primer.

The guidance is largely unchanged from what the agencies proposed last year. It directs institutions to craft policies that consider a wide array of potential shortcomings.

Year-over-year consumer dollars for home remodeling projects should drop 0.5% by 2Q25, after a 3% decline for the trailing 12 months, said the Joint Center for Housing Studies of Harvard University.

A planned update to the core Reg X servicing rule is needed but the industry wants more time to eye it with several new proposals pending in an election year.

Gow’s addition is the latest major leadership development at the firm, which also named a new chairman and CEO this year but saw the recent departure of its chief technology officer.

The Dallas-based company, whose earnings per share fell short of consensus by 6 cents, lowered its revenue forecast and raised its expense outlook. Its stock price fell more than 8% on Thursday.

Morning Volatility, Afternoon Drift

Bonds began the day in modestly weaker territory before undergoing a bit of volatility after the morning economic data.  The two reports in question were Jobless Claims, which voted in favor of lower yields, and the Philly Fed Index, which made the opposite case. Bonds wend both ways before the bulls ultimately took control and got yields back to unchanged levels just before 11am.  After that, it was a slow grind to the weakest levels of the day, but all of the above played out in a range that was just as narrow as the last few days.

Econ Data / Events

Jobless Claims

243k vs 230k f’cast, 223k f’cast

Continued Claims

1867k vs 1860k f’cast, 1847k prev

Philly Fed Index

13.9 vs 2.9 f’cast, 1.3 prev

Philly Fed Prices Paid

19.8 vs 22.5 prev

Market Movement Recap

08:53 AM Initial gains after Jobless Claims data, but pulling back a bit now.  10yr up over 2bps at 4.18+.  MBS down 3 ticks (0.09)

11:05 AM Back into positive territory in MBS, up 1 tick (.03).  10yr still up 1.2bps at 4.17, but well off the highs.

02:43 PM slightly weaker over the past few hours.  MBS down 2 ticks (.06) and 10yr up 2.3bps at 4.18

04:39 PM heading out at the weakest levels.  MBS down 6 ticks (.19) and 10yr up 4.4bps at 4.201