A prospect that might have seemed unthinkable just a couple short weeks ago is coming into view for bond traders: The potential for US Treasuries to post an annual gain for the first time since 2020.

Rather than adding the option of using two rather than three prior to score updates, the company suggested the former functionality be added after or scrapped.

Banks have been working to sell portfolios of commercial-property debt as they seek to manage their exposure to the sector. Soaring borrowing costs have weighed on valuations, with commercial real estate prices slumping 16% in September from a peak in March 2022, according to real estate analytics firm Green Street.

Direct-to-consumer lenders and iBuyers could be beneficiaries of any rule changes, analysts say.

The Financial Stability Oversight Council enhanced its powers to designate nonbank financial institutions as systemically important Friday, emphasizing transparency and the need to protect financial stability.

The fintech rolled out a Lending-as-a-Service (LaaS) platform, which gives lenders access to its system. The first mortgage shop to sign up is Guaranteed Rate.

If Data Stays in This Week’s Range, The Highs Are In

Friday’s weak jobs report and strong bond market reaction raise bigger questions than they answer.  Granted, it is very nice to answer the question of whether the gains over the past two days were justified, but now we have to wonder if this entire week is enough to inform a long-term rate ceiling.  Using our own advice about needing to see 2-3 months of similar data before drawing such conclusions, clearly it’s not enough.  If we could know that the next 2 rounds of big-ticket data would be similarly cool, the top is in for rates.  That’s still a big “if.”

Econ Data / Events

Nonfarm Payrolls

150k vs 180k f’cast, 297k prev

Unemployment Rate

3.9 vs 3.8 f’cast, 3.8 prev

Earnings

0.2 vs 0.3 f’cast, 0.3 prev

ISM Services PMI

51.8 v 53.0 f’cast

Market Movement Recap

09:35 AM Slightly stronger overnight and now much stronger after jobs data.  MBS up a full point.  10yr down 15.5bps at 4.504.

11:32 AM Off the best levels by roughly 3/8ths in MBS, but still up 5/8ths on the day.  10yr down 13.6bps at 4.527.

02:17 PM No further losses in MBS.  6.0 coupons back up more than 3/4ths of a point.  10yr down 11.5bps at 4.554

04:48 PM 10yr yield drifting higher into the 5pm close, but still down 8.4bps on the day at 4.579.  MBS have been flatter with 6.0 coupons just 1 tick (0.03) off a 3/4 point gain.

The average top tier 30yr fixed mortgage rate was over 8% as recently as October 19th.  At the start of the present week, things weren’t much better at 7.92%.  What a difference a few days make–especially the last 3.  The improvement seen on Wed-Fri is the 3rd biggest in well over a decade.  And if we throw out March 2020 (as we often do, due to unprecedented volatility relating to the onset of the pandemic), we’re left with only one other example back early November of 2022. So is this some kind of seasonal pattern?  You’d be forgiven for drawing that conclusion, but in both cases, rates had recently surged to new long-term highs and then encountered surprisingly friendly economic data.  Last November it was a low reading in the Consumer Price Index (CPI) that gave investors hope regarding a shift in inflation.  Unfortunately, that shift proved to be a head-fake and rates continued lower into February of 2023, it’s been up, up, and away since then. This time around, scheduled data gets the credit again, but there’s a more robust assortment.  The good times began to roll on Wednesday after Treasury announced lower-than-expected auction amounts (lower supply of bonds relative to expectations means lower rates, all other things being equal).  The rally gained momentum with economic data at 10am and again with the Fed announcement in the afternoon.  Thursday was mild by comparison, but kept the trajectory intact with help from slightly higher Jobless Claims data, and especially from traders exiting bets on higher rates.  In the bond market, the simple act of “no longer betting on higher rates” forces a trader to effectively enter a bet on lower rates.

The upcoming credit price changes were not discussed yesterday at the counter in Paul’s Pancake Parlor here in Missoula, but they might have been. As well as the resignation of NAR’s CEO… are there cracks in the powerful NAR empire? One thing that did come up was the commercial real estate market, reminding us that people need a place to live, not necessarily a place to work. Want to know how bad the commercial real estate market may become? Follow the money. “Blackstone Real Estate Income Trust’s investors sought to pull $2.2 billion last month, compared with $2.1 billion in September… BREIT returned about $1.3 billion to investors, or about 56 percent of what was requested, the ‘highest payout percentage’ since redemptions were restricted last year… The real estate trust is a colossus in U.S. property markets, with its reach spanning from apartments to data centers. In late 2022, BREIT curbed withdrawals after redemption requests picked up and its wealthy clients became jittery about having money locked into commercial real estate.” (Today’s podcast can be found here, sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology and other services to the mortgage industry for almost four decades.) Lender and Broker Software, Products, and Services Save $100 on every application with Truv! Orion Lending slashed their annual expenses by $300,000 and boosted its conversion rate by 32 percent using Truv’s income and employment verification solution. “Truv transformed our verification process, expanding our reach and cutting costs,” asserts Richard Plummer, EVP of Operations at Orion Lending. Stop the financial bleed. Contact TRUV today to discuss how we can help you with your income, employment, insurance, and asset verifications.

There was a lot riding on this morning’s jobs report.  It was in an ideal position to cast a vote on this week’s bullish correction.  A big beat was likely to undo much of the strength seen over the previous 2 days.  A big miss was likely to accelerate the gains.  At 150k vs a 180k forecast, today’s miss was much smaller than the average deviation from median forecasts, but bonds have rallied significantly nonetheless. 
With that, we’ve navigated the most highly consequential week since mid-September without hitting any obstacles.  Given the number of obstacles and their level of importance, it’s not an exaggeration to say that bonds experienced a tremendously unlikely combination of friendly tailwinds.  It doesn’t necessarily turn the tide of the war, but it’s the most decisive battle in our favor in about a year.
Don’t be surprised or disheartened if we see a bit of a correction from here.  Again, bonds have covered A LOT of ground this week.  Next week’s calendar is empty by comparison with the exception of new, bigger Treasury auctions.  It’s entirely reasonable to see the morning rally hit resistance at 4.55.  If we close anywhere near that level, it’s still a moonshot.