Uneventful Start. Decent Gains After 20yr Bond Auction

The holiday-shortened trading week is off to exactly the sort of uneventful start we would expect given the lack of meaningful market movers on the calendar.  Today’s 20yr bond auction was one of the only events that had a chance to have an impact.  The slightly stronger auction results ended up having a modestly positive impact on bonds, quickly helping Treasuries exchange a few bps of weakness for a few bps of strength.  MBS moved from up about an eighth of a point and then held perfectly flat for the rest of the day.

Market Movement Recap

09:39 AM Slightly weaker overnight. Volatility in a narrow range.  10yr up less than 2bps at 4.457.  MBS down 5 ticks (.16).

12:59 PM Slightly weaker ahead of the auction with MBS down 3 ticks from intraday highs and 5 ticks (.16) on the day.

03:03 PM Solid gains after auction and holding steady since then.  MBS up 2 ticks (.06) and 10yr yields down 1.7bps at 4.422.

Mortgage rates moved down to the lowest levels in roughly 2 months last week.  To be fair, they had already hit similar levels earlier in the month after the jobs report on November 3rd.  This time around, we’ve seen two consecutive business days at nearly the same, low levels. “Low” is relative, of course.  Before September, today’s rates would have been depressingly high, but they represent significant progress from October’s multi-decade highs of over 8% for conventional 30yr fixed rates. For the same scenario, today’s rates are down 5/8ths of a percent from those peaks.  For the bond market that underlies and dictates day-to-day rate movement, it is shaping up to be an uneventful couple of weeks.  Surprises are always possible, but without them, there isn’t much on the calendar of scheduled events that would cause a big reaction in rates.

After last week’s big CPI-driven rally, yields settled into an increasingly calm, sideways trend marked by resistance at the post-CPI lows.  It would be impossible to write a more basic or obvious script for bonds given the looming Thanksgiving holiday and the subsequent week without any major scheduled data.  Indeed, the biggest risk to this outlook is simply that it seems too obvious and that we just haven’t seen bonds hold as steady as the near term outlook suggests in quite a while.  To be clear, we can’t make a case for 10s trading outside an absolute range of 10-15bps both this week and next, and that’s a rare enough occurrence to doubt that it will happen again (last time was September 2021).

To be clear and to reiterate, the “base case” is not quite the same as a prediction (predictions are for suckers).  Rather, it’s more like saying “all other things being equal,” or “the path of least resistance.”  In other words, if bonds are going to trade outside this range before December, it’s unlikely to be due to anything that’s going to transpire on the economic calendar.
What about today’s 20yr bond auction?  After all, auctions have been important recently.  While that’s true, it’s also true that a 20yr auction is not in the same league as 10s or even 30s.  The bond market was also still finding its range when previous auction cycle happened.  To be fair, a wild enough result is probably capable of spoiling our range-bound fantasy, but it would need to be very wild indeed.

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Policymakers are all too quick to categorize IMBs as financially risky institutions; making them easy targets for stricter – and unnecessary – federal oversight and regulatory efforts, Stevens and Olson argue.

The average mortgage lender was fairly close to their lowest levels of the past 2 months by yesterday afternoon and today saw almost no change.  That’s a departure from the recent trend of larger movements, but also an expected shift given the absence of big ticket economic data. Big ticket data refers to the scheduled economic reports like the Consumer Price Index (CPI) which was responsible for the largest portion of this week’s improvement and Retail Sales which pushed back in the other direction the following day. Thankfully, Retail Sales wasn’t nearly up to the task of spoiling the good times for interest rates this week.  The next data with the power to help or hurt in any major way won’t arrive until the first full week of December.  In the meantime, the baseline scenario is for lower volatility in a more sideways trend.   The only caveat is that Thanksgiving week can occasionally see very random volatility that is not connected to underlying events or data.  This is a byproduct of the less robust trading environment on major holiday weeks.  All that to say, even if it seems that rates are on the move next week, it could just be an illusion that requires confirmation or rejection 2 weeks later.