Little has changed since last Friday other than yields being a few bps higher.  The bond market still has to digest a condensed auction calendar over the next 2 days.  CPI is still a focal point tomorrow.  And central bank announcements round out the week, led by the Fed on Wednesday afternoon.  As far as the Fed is concerned, the dot plot is worth 95%+ of the market’s attention with the press conference accounting for the other 5%.  Some might weight this more evenly, but few would take the dots out of the spotlight.  
Monday is most notable due to the dual auction offerings with the 3yr at 11:30am ET and the 10yr at 1pm ET.  Given the big ticket events in the next 2 days, it wouldn’t be the weirdest thing in the world to see lackluster auction results, but we suspect that possibility has driven some of the linear weakness on Friday and in the overnight session.

Over half of mortgage professionals in an upcoming Arizent survey suggest severe weather events will disrupt the housing market next year.

Benchmark two-year yields, those most closely tied to the outlook for US central-bank policy, rose as much as 14 basis points, the most in a day since June.

While home lending employment fell, a stronger-than-expected report on the broader labor market immediately raised concerns about the potential for higher interest rates.

The Treasury Department’s Community Development Financial Institutions Fund has introduced significant updates to the CDFI certification application, aiming to simplify the process and establish clearer standards for responsible lending and community development.

The AI-powered feature allows consumers to change the appearance of walls, floors and countertops in home photos displayed on the brokerage’s website.

Heading into this week (and even throughout the entirety of last week) we were mostly focused on seeing today’s jobs report for the next big dose of influence on the mortgage rate landscape. Unsurprisingly, a strong report resulted in higher rates, but not as high as we might have imagined. In fact, many borrowers will barely see a difference compared to yesterday’s rate offerings with the average lender still in the low 7s for a flawless scenario. The jobs report showed moderately stronger job creation compared to the median forecast.  In addition, the unemployment rate came in at 3.7% versus 3.9% previously (also the forecast for today). Strong labor market data is bad for rates, all other things being equal, because a stronger economy runs the risk of higher inflation and inflation is the mortal enemy of interest rates. Investors will now turn their attention to a report that’s actually focused on inflation: next Tuesday’s Consumer Price Index (CPI)–the only other monthly economic report that could claim to be as important as the jobs report (as far as interest rates are concerned).  A day later, we’ll get a new set of rate forecasts from the Fed.  As the news focuses on the fact that the Fed “held rates steady,” financial markets will be dissecting those forecasts in order to hone in on the expected shift in the Fed’s outlook heading into 2024.  Bottom line: the combination of Tuesday and Wednesday’s events could create more volatility for rates than today’s jobs report.  

Surprisingly Resilient Despite Stronger NFP

Nonfarm Payrolls (NFP)–the headline component of the big jobs report came in higher than expected today.  Adding to the challenges for the bond market, the unemployment rate ticked down to 3.7% from 3.9% previously (also the forecast for today). Given the stakes, we wouldn’t have been surprised to see a sharper spike in rates today.  Treasuries know… They spiked 8bps–not huge, but in the range of likely reactions based on the data.  So what’s up with MBS only losing an eighth of a point?  It’s not a duration issue (after all, 5yr Treasuries had a worse day than 10s).  One of the only ways to reconcile the outperformance is to consider apprehension ahead of next week’s Treasury auction cycle.  Everything else that merits apprehension (like CPI and Fed Day) would apply to MBS as well as Treasuries.

Econ Data / Events

Nonfarm Payrolls

199k vs 180k f’cast, 150k prev

Unemployment Rate

3.7 vs 3.9 f’cast, 3.9 prev

Participation Rate 

up 0.1

Wages

0.4 vs 0.3 f’cast, 0.2 prev

Consumer Sentiment

69.4 vs 62.0 f’cast

1yr inflation expectations

Down 1.4% (huge move)

5yr inflation expectations

Down 0.4%

Market Movement Recap

08:39 AM Modestly weaker before jobs data and much weaker after.  10s up 9.5bps at 4.243 and MBS down half a point.

10:59 AM MBS off weakest levels, mostly due to improved liquidity, now down 9 ticks (.28) on the day.  10yr up 9.9bps at 4.247

12:03 PM Back to weakest levels now with 10s up 11+ bps at 4.26.  MBS down roughly 3/8ths in 6.0 coupons and half a point in 5.5 coupons. 

02:29 PM Back up to the best levels of the day now.  MBS down only an eighth.  10yr recovering as well, up 8.3bps at 4.231.

04:45 PM MBS going out at highs, but not really higher than the last update (still down an eighth).  10yr also in similar territory, up 8bps at 4.228.

Bond bulls have been on parade since November 1st and especially since November 14th (CPI).  Since then, we haven’t seen any real threats to the linear rally trend.  It’s a testament to that bullishness that today’s 10bp spike in 10yr Treasury yields actually still manages to fit inside that bullish narrative, even if only just.

On another note, we’ve seen some analysis floating around out there that suggests the bond market is “over” the employment data and that inflation is the only thing that matters.  While it’s true that inflation probably matters most, this week’s two biggest doses of volume and movement suggest the labor market is still a hot topic (a claim that’s only edified by the fact that today’s jobs report wasn’t exactly a huge beat).

“What do you call James Bond having a bath? Bubble 07.” In different bond matters, mortgage rates will always be higher than Treasury rates, in part because of the prepayment risk in mortgages that doesn’t exist with Treasury bonds. With the drop in rates, sales management personnel at lenders are busy figuring out how best to remind the staff about EPO (early payoff) penalties levied by investors while at the same time working on ways to save money besides furloughing, cutting staff, outsourcing, and re-doing vendor contracts. The recent decline in rates and increase in applications is welcome: According to Curinos, November 2023 funded mortgage volume decreased 11 percent YoY and 10 percent MoM. In the Retail channel, funded volume was down 22 percent YoY and 10% MoM. The average 30-year conforming retail funded rate in November was 7.45 percent, 25bps higher than October and 85bps higher than the same month last year. (Curinos sources a statistically significant data set directly from lenders to produce these benchmark figures, and drills into this data further here.) Today’s podcast can be found here, and this week’s is sponsored by nCino, makers of the nCino Mortgage Suite for the modern mortgage lender. nCino Mortgage Suite’s three core products, nCino Mortgage, nCino Incentive Compensation, and nCino Mortgage Analytics, unite the people, systems, and stages of the mortgage process. Hear an Interview with nCino’s Ben Miller on incentive compensation data and origination cost reductions that are separating profitable from unprofitable companies in the mortgage industry.