Bonds ended the previous week at the highest yields since before the December Fed announcement.  The story behind the that story is that yields were roughly unchanged from opening levels on Friday, despite high volume responses to the jobs report and ISM Services data.  The sideways grind speaks to the latest dose of uncertainty (and the fact that last week’s data wasn’t able to clear it up).  Now at the start of the new week, trading levels have improved, but not beyond the range seen on Friday.  If we could only focus on one calendar event with power to add clarity to present trends, it would be Thursday’s CPI.  Between now and then, the Treasury auction cycle (Tue-Thu) may provide some context on the palatability of sub 4% 10yr yields.
In terms of recent trends, it can increasingly be argued that the downtrend seen in Nov/Dec is over and that a smaller countertrend (yellow lines) is intact until further notice.  We wouldn’t think much of the new uptrend until and unless it took yields up an over 4.09.

We discussed a question on MBS Live this morning regarding the potential influence of oil prices on bonds.  Because oil is always a consideration for inflation and inflation is always a consideration for rates, it would be foolish to completely ignore the relationship between oil and rates.  That said, it’s a complex relationship.  At any given time, other factors may be weighing on one or the other in such a way that the correlation completely inverts.
The following two charts look at short and medium term examples of those inversions.  The third chart shows broader correlation in the long term.

California is home to approximately 39 million residents, which is about one-eighth of the U.S. population, more than the entire population of Canada, and accounts for 20-25 percent of residential loan production. Most California’s residents belong to ethnic minority groups; in fact, one out of every four Californians was not born in the U.S. Here in Northern California a fair number of people are in real estate and lending, so predictions about the Federal Reserve are of great interest. Primary dealer banks have pushed back their predictions on when the Federal Reserve will end its quantitative tightening process to the fourth quarter, according to a survey by the Federal Reserve Bank of New York. On that timeline, the Fed’s balance sheet would shrink from the current $7.764 trillion to $6.75 trillion… through securities maturing, mortgage loans paying off early, or the Fed selling those securities. The market expects this, which is a good thing. (Today’s podcast can be found here, and this week’s is sponsored by Truework. By connecting every verification method into one platform, Truework helps lenders eliminate process disruptions, maintain a competitive borrower experience, and reduce the fiscal impact of verifying income. Hear an interview with Smith, Gambrell & Russell’s Richard J. Traub on commercial real estate happenings and why those in the residential sector should care about the space.) Broker and Lender Services, Programs, and Software

The wholesaler asked the creator of “Rocket Pro TPO vs. UWM” to end all improper use of intellectual property and delete any false and defamatory content.

The partnership between the mortgage technology provider and Halcyon is aimed at diversifying lender revenue and strengthening relationships with borrowers.

The number, juxtaposed with a recent survey that suggests companies will hire, raises questions as to whether numbers have bottomed out. Much depends on rates.

Low refinance volume creates a “relative disadvantage” for Rocket, which historically had a much larger share of that market versus purchase, a note by Bose George, analyst at Keefe, Bruyette & Woods, said.

Southern Bancorp in Little Rock, Arkansas, plans to put $250 million in equity capital it received from the Treasury Department to good use making mortgages and acquiring banks.

ISM Outshines NFP, But Neither Ended Up Leaving a Mark

It has happened before, but it’s not common: those Fridays where bonds move in one direction in response to the jobs report only to move even more in the opposite direction after the ISM Non-Manufacturing Index.  Considering that both moves were ultimately erased today, we don’t feel too compelled to overanalyze, but ISM definitely had the upper hand.  Chalk that up to the jobs report being not as strong as the headline might suggest and to ISM’s employment component being staggeringly weaker. Bonds escaped with minimal damage–especially MBS as they don’t have to worry about an auction cycle like Treasuries next week.

Econ Data / Events

Nonfarm Payrolls

216k vs 170k f’cast, 173k prev

Unemployment Rate

3.7% vs 3.8% f’cast

Participation rate

down 0.3% (implies higher unemployment)

ISM Services PMI

50.6 vs 52.6 f’cast, 52.7 prev

ISM Services Employment 

lowest since July 2020

ISM Service Prices

57.4 vs 58.3 prev

Market Movement Recap

08:57 AM Weaker overnight with additional selling after jobs report.  Some resilience now.  MBS back to pre-NFP levels, down a quarter point on the day.  10yr up only 5bps at 4.055 after being as high as 4.10

10:11 AM More gains after ISM data.  10yr down 4.5bps at 3.959.  MBS up 1 tick (0.03).

12:35 PM post-ISM rally fading.  10yr up 3.2bps at 4.036 and MBS down nearly an eighth of a point.

02:14 PM Holding ground now, slightly better than the early PM swoon.  MBS down only 2 ticks (.06) and 10yr up 2.3bps at 4.027.

05:13 PM MBS outperform into the close, ultimately hitting unchanged levels as Treasuries ticked up 4.7bps to 4.051.  Apprehension over next week’s auction cycle?  Curve steepening favoring shorter durations?  Either way we’ll take it.

The big jobs report on the first Friday of any given month can be big business for interest rate volatility.  Today’s example was no exception, but let’s emphasize the “can be” part of that claim.  There’s potential, and then there’s reality. At first, it looked like the jobs report might live up to its potential.  Job creation was higher than expected–something that’s normally bad for interest rates.  True to form, the bonds that underlie mortgage rate movement began to jump immediately following the release of the data.  But in the next few minutes, other aspects of the report helped balance the reaction. Incidentally, other economic data also helped push back in the other direction.  The ISM Services index–a broad based measurement of the health of the services sector from the Institute for Supply Management–fell to levels that indicated essentially zero growth.  More importantly, the employment-specific component of the index plummeted to the lowest levels since covid lockdowns.  The bond market was even more willing to react to ISM than to the jobs report. The net effect was modestly positive for mortgage rates, but slow losses into the afternoon left the bond market in roughly unchanged territory.  The average mortgage lender ended the day just a hair lower than yesterday afternoon.

Friday is off to a mixed start with the jobs report doing some damage and the ISM Services data undoing that damage.  Things are pretty much that simple, so we won’t belabor the point.

Is the ISM Services data really accounting for more movement and volume than the mighty jobs report?  In a word, yes, but there are some reasons.  First off, we might refer to today’s jobs report as somewhat mixed.  Indeed, it was higher than expected at a headline level, but previous months were revised lower.  Indeed, the unemployment rate remained at 3.7%, but the participation rate fell by 0.3%, effectively implying a net increase to 4.0%.  In short, the jobs report wasn’t big news today, and in the chart above, you can see the bond market already reversing the trade completely by the time ISM hit.
ISM data was more meaningful.  In several ways, it was the weakest report in a few years, but mostly in terms of the employment component.  This got the market’s attention more than anything, but it hasn’t proven to be a lasting source of inspiration for bond bulls.