Best Levels in More Than a Month Ahead of Jobs Report

At one point this morning, 10yr yields were close to breaking into new 6-month lows.  By the 3pm CME close, we had to settle for the lowest yields since December 28th.  The gains arrived rapidly just this week with concerns over the regional banking sector causing a semblance of the drama seen in March 2023. This has arguably been a bigger consideration for rates than the week’s economic data.  If we include Treasury supply updates, we could argue that data has played a small supporting role at best.  As such, Friday’s jobs report is now the first, last, and only huge potential market mover of the week.

Econ Data / Events

Jobless Claims

224k vs 212k f’cast, 215k prev

ISM Manufacturing 

49.1 vs 47.0 f’cast, 47.1 prev

ISM Prices Paid

52.9 vs 46.9 f’cast, 45.2 prev

Market Movement Recap

08:34 AM A hair weaker overnight with a modest bounce after data.  MBS unchanged.  10yr down 1bp at 3.907.

10:18 AM Modest selling after ISM Data.  10yr still down 1.6bps at 3.823. MBS down 1 tick on the day

11:39 AM Sharp rally starting after 10:30am on regional bank volatility.  10yr down 7.5bps at 3.841.  MBS up 2 ticks (0.06), but possibly as much as 4 ticks (.125) after adjusting for liquidity.

03:47 PM A bit of a give-back into 2pm, but leveling off now.  10yr down 5.5bps at 3.861.  MBS up 1 tick (.03).

Ahead of Groundhog Day tomorrow, one realizes that our industry certainly has its share of unexpected ups and downs. The latest example of a “down” is Mike Gill, a SVP of Capital Markets at the Housing Policy Council, who is fighting for his life after a shooting during a car-jack. Let’s all think positive thoughts! In other “people who make a difference” news, Brian Levy has some nice words to say about ex-MBA president and FHA Commissioner Dave Stevens in his most recent Mortgage Musings. Levy highlighted how Stevens’ death is a big loss for housing finance thought leadership, especially for an industry already quite low on the supply of independent thought leaders. (Dave’s Life Celebration will be held tomorrow, February 2nd from 2-5:30 at Capitol One Hall, Tyson’s Corner, Virginia.) Today’s Commentary podcast can be found here and this week’s is sponsored by Calque. With The Trade-In Mortgage powered by Calque, lenders help their clients negotiate a lower purchase price, reduce their interest payments, and eliminate PMI. Hear an interview with Calque’s Jeremy Foster and Cross Country Mortgage’s Nikki James on helping clients negotiate a lower purchase price, reduce their interest payments, and eliminate PMI. Lender and Broker Software, Products, and Services “PlainsCapital Bank National Warehouse Lending, a subsidiary of Hilltop Holdings (NYSE: HTH), is committed to providing mortgage lenders with a sustainable funding source in an uncertain market. With over 30 years’ experience and a well-capitalized, diversified financial holding company, PlainsCapital Bank National Warehouse Lending provides confidence to meet our mortgage lending partners funding needs. With exceptional operational performance, and a focus on relationship-driven business geared towards long-term success, we do not dwell on unnecessary fees. With PlainsCapital Bank National Warehouse Lending there are no non-usage fees, no application or renewal fees, no third party due diligence fees, and no interest charged on the day your loan funds. If you are attending the TMBA Southern Secondary Conference in Houston and interested in learning more about PlainsCapital Bank National Warehouse Lending please contact Deric Barnett or Brent Amos.”

It is undoubtedly ironic that the Fed just removed a sentence that had been in the statement since March 2023 regarding the banking system being sound and resilient only for the banking system to be the focus of the bond market rally over the past 2 days.  To be fair, bonds were already inching into stronger territory this morning, but they clearly responded to a swoon in regional bank stocks this morning, or more accurately, to the newswire coverage of that swoon.  Data has been a supporting actor, with claims helping at 8:30am and ISM hurting just a bit at 10am.

A key Senator had urged Fed Chairman Jerome Powell to lower rates early this year, but although there’s more consensus on making such a move, it now looks unlikely to happen until after the next meeting.

The wholesale giant touts the move as giving brokers a leg up on banks and retail lenders waiting for the next origination wave.

The parent company of Flagstar Bank surprised investors by slashing its dividend, charging off two large real-estate loans and preparing for more trouble in the office and multifamily sectors.

Aspiring buyers took out fewer loans last week, leading to the overall decline, but the average purchase-loan size also surged to its highest mark since last spring, the Mortgage Bankers Association said.

The company’s building unit saw income slow, but the mortgage banking division number accelerated on both a quarterly and annual basis.

This is a challenging day to attempt to understand the relationship between events and rate movement.  At the most superficial level, rates are much lower and it was a Fed day.  Because Fed days often cause big rate movement, it’s logical to assume that rates are lower because the Fed “did something.” We already know the Fed didn’t cut rates today and that a Fed rate cut/hike is never an indication of 30yr fixed mortgage rates changing on the same day.  But we also know mortgage rates can react to other things the Fed says in the statement or press conference.   Even then, the Fed only caused some sideways volatility in the underlying bond market this afternoon.  Mortgage rates were already noticeably lower before the Fed, largely due to timing of yesterday’s bond market improvement in conjunction with more bond market improvement this morning.  The latter is attributable to economic data and headlines regarding banking troubles for NY Community Bancorp.  There is even some bond market improvement in the afternoon (attributable to esoteric non-Fed-related events that have to do with month-end bookkeeping) that has yet to be reflected on many lenders’ rate sheets. All of the above adds up to a very good day for rates with the average lender dropping in a noticeable way for the first time in weeks.  Additional gains will depend on the incoming economic data or, as we were reminded today, unscheduled events that cause concern in the market.

Lots of Volatility But Not Much to Do With The Fed

Today was indeed a Fed day and bonds definitely have a track record of volatility on Fed Days.  We could be forgiven, then, for assuming that today’s bigger moves were a product of the Fed, but we can really only give them credit for some back and forth in the 2pm-3:59pm time frame.  Those happened to be the smallest directional moves of the day.  The AM hours saw a bigger rally for reasons discussed in this morning’s commentary.  The PM hours saw a bigger rally due to month-end index extension buying. The Fed ended up doing very little for the longer end of the yield curve despite ruining the day for near-term Fed Funds Futures.

Econ Data / Events

Employment Cost Index

0.9 vs 1.0 f’cast, 1.1 prev

Treasury Quarterly Refunding Announcement

auction size changes as expected

Market Movement Recap

10:49 AM Initial gains after ECI data and TSY refunding announcement.  More gains into the NYSE open.  10yr down 8.2bps at 3.954.  MBS up a quarter point.

01:30 PM Holding near best levels ahead of Fed.  10yr down 7.5bps at 3.961.  MBS up 7 ticks (.23).

02:08 PM First move is weaker after Fed announcement specifies no cuts until inflation in check.  10yr still down 5bps on the day at 3.986, but up from lows of 3.944.  MBS up 2 ticks (.06), but down more than an eighth vs pre-Fed highs.

04:08 PM Plenty of back and forth after the Fed.  Today’s list of updates and alerts provides more granular detail.  Most recently, month-end buying is bringing bonds back to best levels of the day.  10yr down almost 11bps at 3.929.  MBS up a quarter point.