Weak Data, Weak Auction, Weak Bonds

The simplest way to view today’s moderate bond market weakness is as a pure and logical reaction to the fundamental market movers.  9:45am brought stronger economic data as well as some unfriendly headlines from the Bank of Canada (BOC).  That was enough to undo a bit of overnight strength.  Then at 1pm, an unequivocally bad 5yr Treasury auction did the rest of the damage.  In the bigger picture, bonds are favoring a trend toward higher yields in January.  Some would suggest this is defensive positioning for the Fed and next week’s data.

Econ Data / Events

S&P Global PMIs

Manufacturing 50.3 vs 47.9 f’cast, 47.9 prev
Services  52.9 vs 51.0 f’cast, 51.4 prev

Market Movement Recap

09:54 AM Weaker after data.  10yr down 1bp on the day at 4.122.  MBS down 1 tick (.03).

11:43 AM 5.5 coupons are now down 3 ticks (.09) on the day but well over a quarter point from the AM highs.  10yr yield are up 1.5bps to 4.147.

01:26 PM additional weakness after 5yr auction.  10yr up 4bps at 4.172.  MBS down 5 ticks (.16).

04:06 PM New lows at the close with MBS down 6-7 ticks (.19-.22) and 10yr yields up 5bps to 4.18+.

For the first time this week, the economic calendar is not completely empty.  Granted, the S&P Global PMI data is not the heaviest of hitters, but it is having an impact so far this morning.  Stronger results are contributing to an erosion of overnight gains.  The only confounding factor is the Bank of Canada announcement which came out at exactly the same time.  It was a tad hawkish (or rather, not as dovish as the market may have hoped), and has arguably contributed to additional weakness after 9:45am ET.

If we zoom in a bit and allow the y-axes to readjust, we see that most of the Treasury selling was done by the time the Canadian dollar was only halfway through reacting to the BOC.  This suggests the US bond market is paying more attention to the data.

Still to come: 5yr Treasury auction at 1pm ET.  This is probably the second most important auction in the 2-30yr range these days, behind the 10yr.  As always, relevant Treasury auctions have the potential to cause a reaction, but are just as likely to have almost no discernible impact.

As attendees head home from the MBA’s IMB in New Orleans, plenty will be eating airplane chow. Maybe you should buy vittles on the ground instead. Given the breezy weather in New Orleans, leather jackets are out in force. Those in attendance are talking about several good things that happened in 2023, impacting mortgage rates and lenders. Inflation has come down, hourly wages outpaced inflation the last seven months of the year, we didn’t have a recession or a banking crisis that some “experts” expected. In fact, the S&P 500 was up 23 percent, and the economy grew a decent 2.6 percent. Credit costs and trigger leads are a big item; today’s L1 Mortgage Matters session at 2PM ET features John Fleming, of John Fleming Law and the Texas MBA, and a good update on the trigger lead situation. Basel III is a concern; as MBA President Bob Broeksmit points out, no bank has ever failed due to servicing requirements, and we should guard against non-sensical choices from Washington DC. (Today’s podcast can be found here and this week’s is brought to you LoanCare. LoanCare has successfully navigated clients and homeowners through market change for 40 years. The mortgage subservicer is known for delivering superior customer experience through personalization and convenience via its portfolio management tool, LoanCare Analytics™, supporting MSR investors with a focus on customer engagement, liquidity, and credit risk. Hear an interview with Deephaven’s Tom Davis on the Non-QM space and what to expect from nontraditional financing markets in 2024.)

Mortgage application activity has increased in each of the three weeks of the New Year, even though two of those weeks were impacted by federal holidays. There was a strong purchase loan component each week as well. The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of mortgage loan application volume, increased 3.7 percent on a seasonally adjusted basis during the week ended January 19, including an adjustment to account for the Martin Luther King observance. On an unadjusted basis, the Index was down 4.0 percent from the previous week’s level. The Refinance Index’s holiday-adjusted version fell 7.0 percent week-over-week and was 8.0 percent lower than the same week one year ago. The unadjusted Index declined 16.0 percent for the week and 8.0 percent year-over-year. The share of refinance applications dropped to 32.7 percent from 37.5 percent the previous week. [refiappschart] The seasonally adjusted Purchase Index increased 8.0 percent from one week earlier. The unadjusted Purchase Index increased 3.0 percent, remaining 18.0 percent below its level during the same week in 2023.   [purchaseappschart] “Mortgage rates increased slightly last week but, there continues to be an upward trend in purchase activity. Conventional and FHA purchase applications drove most of the increase last week as some buyers moved to act early this season,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Refinance applications declined over the week and remained at low levels. There is still little incentive for homeowners to refinance with rates at these levels.”

The Salt Lake City bank says that it doesn’t expect major losses, even though its problem loans grew at the end of 2023.

While becoming more popular in the past year as mortgage rates have increased, the differential is small between those that did and didn’t pay points, Freddie Mac said.

Slightly more than one-fourth of borrowers with it experienced pandemic-related challenges, the Mortgage Bankers Association found.

A new “Social MBS” label will be applied to eligible single-family collateral from both government-sponsored enterprises based on a new mission index score.

The real estate markets where prices are expected to rise the most this year will see an average increase of 5.14%.

Remarkably little happened in the bond market today.  That means that mortgage lenders shouldn’t have any obvious motivations to make big changes to their rates, and in the big picture, that’s true.  Today’s rates are still very close to the past 3 or 4 days. If we zoom in farther than we probably need to, however, we find rates inching gently higher more often than not over the past month.  Today was just another day in that regard.  Unfortunately, it was the day where said ‘inching’ brought rates back up to last Friday’s levels.  Those (and now these) were the highest since December 13th. From trough to peak, we’ve seen an increase of 0.31%, almost perfectly matching the increase in 10yr Treasury yields (a common benchmark to compare the relative performance of mortgage rate movement). In the big picture, this increase is an acceptable loss given the 1.20% drop that preceded it.  In market-speak, this would be a correction and a fairly non-threatening one at that.   From here, rates have room to move in either direction depending on the tone of upcoming economic data and comments from the Fed.  The most important data won’t start hitting until next week, but there will be a few reports out on Thursday morning that could cause some volatility.