Bonds Surprisingly Willing to Rally on Fed Comments

The only notable market mover for bonds was a rather basic and obvious comment by Fed’s Waller.  In not so many words, he said that there’s a good argument for the Fed to cut rates if inflation keeps falling for several more months.  That puts a March rate cut on the table, quite easily, assuming conditions are met. Fed Funds Futures have already been entertaining such possibilities and other Fed speeches have laid out similar logic, but bonds were nonetheless willing to treat this example more seriously.  The 7yr Treasury auction pushed back against the gains, but the bulls stayed in control with 5bps of improvement in 10yr yields at the 3pm close.

Econ Data / Events

FHFA Home Prices

0.6 vs 0.4 f’cast, 0.7 prev

Case Shiller Home Prices

0.2 vs 0.3 prev

Consumer Confidence

102 vs 101 f’cast, 102.6 prev

Market Movement Recap

09:15 AM At the weaker end of a narrow, sideways range overnight.  MBS down an eighth and 10yr yields up 2.4bps at 4.416.

11:03 AM Best levels of the day after Fed’s Waller comments.  10yr down 3.5bps at 4.357.  MBS up 2 ticks (.06).

03:36 PM Some push-back after 7yr auction, but it was more than erased by the 3pm CME close.  10yr down 5.4bps at 4.338.  MBS up 3/8ths.

The trend in rates has been very linear in the 2nd half of the month and the day-to-day changes have been getting smaller and smaller. On 5 of the last 6 business days, the average 30yr fixed rate has moved by less than 0.02% by the end of the day. Conveniently, most of the gentle moves have been in a friendly direction.  With rates already at 2 month lows last week, the result is gentle descent to slightly lower 2 month lows. Today’s improvement followed the bond market’s reaction to comments from the Fed’s Chris Waller who said that the Fed could cut rates if inflation continued to decline for several months.  Waller also reiterated and amplified his previous comments on the slower pace of economic growth. Specifically, last month Waller said that we’d either need to see slower growth or face a resurgence of inflation.  Today’s comments hearkened back, saying “something appears to be giving, and it’s the pace of the economy.” There are no extremely high profile economic reports on tap this week, so the market is perhaps more willing to react to guidance from Fed speakers.  It continues to be the case that next week’s economic data can have a much larger impact–especially Friday’s jobs report. [thirtyyearmortgagerates]

The tedium that is the 2nd half of November continues to underwhelm. Specifically, we’re in a lull between CPI 2 weeks ago and Nonfarm Payrolls next week.  These are the big data points that will offer clarity for the musings that are creating small-scale volatility in a narrow range.  What musings are those? Today’s most significant example is a comment from Fed’s Waller that can be distilled to a very simple concept: further disinflation = rate cuts. Despite the obvious nature of that comment, the bond market reacted with another push to the lowest yields in months, even if only barely.

Since that is actually a fairly small portion of today’s overall movement, we can do more to confirm Fed-Speak as the inspiration by looking at the reaction in Fed Funds Futures (they should be generally calmer outside of moments when the Fed rate outlook is digesting new inputs).  They fill their role perfectly in this case with none of the AM volatility seen in Treasuries and just as obvious a move in response to Waller. 

Of course the caveat to all this is that it’s a drop in the bigger-picture bucket.  Here’s a longer-term view of the same Fed Funds Futures implied yield (bank failures are highlighted simply to preempt curiosity):

In addition to the Fed-speak, we could also consider another side item for today’s nothing burger: new conforming loan limits. The underlying data for the calculation has been released even though FHFA has yet to officially announce it.  Barring surprises or a calculation error on our side, the number should be close to–if not exactly–$766,550.  This isn’t a market mover as much as an annual milestone for the mortgage/housing market.

If you’re just here for the conforming loan limit news, $766,550 is the number for 2024.   Does this mean no one can get a mortgage for more than $766,550?  No.  The conforming loan limit is the maximum amount that can be guaranteed by Fannie Mae and Freddie Mac (the government-sponsored enterprises or GSEs).  That guarantee has advantages in terms of the loan approval process and   interest rates.  There are plenty of mortgage options for higher amounts or that are not guaranteed by the GSEs, but conforming loans account for a vast majority of new mortgages. $766,550 is the base amount.  Higher cost areas have access to higher limits based on the average home prices in that area.  The county by county limits are listed separately,   HERE. The highest tier is $1,149,825 (base loan limit x 1.5).     Where do these numbers come from? The Federal Housing Finance Agency (FHFA) is the regulator of the GSEs.  It publishes various home price data.  Once the data is in for the 3rd quarter (typically by late November), it is compared to the 3rd quarter of the previous year and home prices are adjusted by the corresponding amount.    In situations where home prices fall, the limit does not fall, but it will not rise again until home prices move back above the levels associated with the previous limit.  For instance, let’s imagine the loan limit was $700k, but prices fell enough to drop it to $600k.  The limit would remain at $700k year after year (even if prices were rising) until prices got back above $700k.

Today brings the release of the two main home price indices (HPIs) for the month of September (yeah, there’s a bit of a lag).   The S&P Case Shiller HPI rose to prominence in the run up to the financial crisis (back then it was just Case Shiller), and has been a mainstay of home price tracking ever since.  While there is a national version of the data, Case Shiller’s more popular HPI focuses on the 20 largest metro areas.  The 20 city index is understandably more volatile (smaller sample size = more volatility), but some would say more indicative of what the average American is seeing. The Federal Housing Finance Agency (FHFA) oversees Fannie and Freddie, the enterprises that set conforming mortgage guidelines and guarantee a vast majority of mortgage debt.  The FHFA also publishes the nation’s broadest HPI.  It’s notably less volatile than Case Shiller, but both tend to be moving in the same direction at any given time. In the current release, for instance, Case Shiller reported a 0.2% increase in prices month-over-month whereas FHFA saw a 0.6% increase.  Both numbers are 0.1% below last month’s revised reading. Year-over-year numbers help put the trends in perspective.  In not so many words, prices are leveling off in moderately stronger territory after early 2023’s shift.  That shift was “deceleration” according to FHFA and outright “contraction” according to Case Shiller’s several months spent in negative territory.  

The case is the second filing in West Virginia this year involving similar fees, as courts and regulators nationwide look to crack down on the servicing practice.

Stress tests suggest systemically important depositories could weather current risks. Meanwhile, single-family arrears remain low, but that business could be impacted.

Financing costs have risen and consolidation has reduced the number of active players. Will policy changes shift the market’s course?

Purchases of new single-family homes decreased 5.6% to a 679,000 annualized pace last month, government data showed Monday.

Back Near Best Levels After Solid Auction Results

For those who’d been watching bond markets on Friday’s half day, it was perhaps slightly disconcerting to see a week’s worth of gains quickly erased.  And while there was no guarantee that “whatever happens on the Friday after Thanksgiving can easily UN-happen the following week,” here we are back in last Wednesday’s range with help from a merely decent 5yr Treasury auction.  Incidentally, last Wednesday’s range saw bonds near their best levels in 2 months.  

Econ Data / Events

New Home Sales

679k vs 723k f’cast, 719k prev

Market Movement Recap

09:07 AM After losing ground on Friday, bonds are bouncing back a bit.  MBS up nearly an eighth and 10yr down 2bps at 4.453.

11:35 AM 2yr auction a bit weaker than expected. No major reaction. 10yr down 3.1bps at 4.437.  MBS up an eighth.

01:07 PM 5yr auction helping. 10yr yields are now down 7.2bps on the day at 4.40 and MBS up 10 ticks (.31).

03:15 PM Best levels of the day at the 3pm CME close with MBS up almost 3/8ths and 10yr yields down 8bps at 4.392.