First Hurdle Cleared. More to Come

On what has the potential to be a momentous week, the bond market has cleared its first major hurdle and is no worse for the wear.  Treasury released the first of two issuance announcements this afternoon, showing a $76 billion decrease versus the July estimate.  That decrease should be partially finalized on Wednesday morning when specific auction sizes are announced. Bonds had been slightly weaker in advance of the news and made modest gains in its wake.  It is best to think of this outcome as a “cleared hurdle” as opposed to the race being won. There are more challenging hurdles in the coming days.  Those will determine the race, but this is a good start nonetheless.  Events and volatility potential only increase from here.

Market Movement Recap

11:05 AM Steadily weaker overnight with a decent recovery into 10am and more selling at 10:30am on BOJ headlines. Bouncing back again now.  10yr up 5.3bps at 4.898.  MBS down an eighth.

01:09 PM MBS resilient despite modest weakness in Treasuries.  10yr up 5.8bps at 4.903.  MBS down an eighth still.

03:14 PM Favorable response to Treasury issuance announcement.  10yr up only 1.7bps at 4.862.  MBS unchanged.

“Hey, just because you’re offended doesn’t mean you’re right.” Lenders, who paid out bucks, believe that they are right and within their rights in “clawing back” bonuses paid to employees, namely producers, when production didn’t pan out. (Let me know if you need it sent to you.) Is the bond market “right” pegging Treasury and mortgage-backed security prices and therefore mortgage rates? The traditional “flight to quality” during international conflict hasn’t materialized for a variety of reasons including currency valuations, traditionally riskier assets such as equities or bitcoin becoming increasingly accepted as safe-haven investments, and the Federal Reserve currently acting as a net seller while the U.S. government is set to issue even more bonds. And despite years of predictions of a recession, the first reading of U.S. GDP for Q3 blew every analyst estimate out of the water: The American economy expanded at an annualized rate of 4.9 percent to reflect the strongest quarter since Q4 2021 and driven by strong consumer spending. Sure, we’re tapping into savings, but we’re still buying! (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. Hear an interview with Canopy Mortgage’s Jeff Reeves on how companies are driving down origination costs.) Lender and Broker Software, Products, and Services

The uncommon combination of events and the market movement potential of this week is hard to overstate. Each layer is important in and of itself, but they combine to form something unique.  Layers include the typically important slate of early-month economic data (ISM, JOLTS, ADP, NFP), a Fed announcement that may all but confirm the ceiling is in, the quarterly announcement of Treasury auction sizes, and a Bank of Japan announcement that may well produce another policy change that impacts US rates, all against the backdrop of an ongoing technical test of the 5% ceiling in 10yr yields.  The data, specifically, provides an opportunity to reconcile reality with recent Fed comments regarding anecdotal economic softening.  Monday starts slow in that regard (i.e. no data) and with trading levels almost perfectly centered on last week’s range.

The transactions grew between second and third quarter, with the new-home market seeing one of its largest surges in cash-buying in 13 years.

First American Financial agreed to pay the New York Attorney General $4.5 million to resolve no-poaching agreement allegations; Old Republic, the first, paid just $1 million.

The number of sellers it works with in the correspondent channel has grown due to pending capital requirements affecting larger depositories’ interest in loans.

Large language models were a big part of the discussion during the company’s earnings call on Thursday.

Even though it is less than two years since it allowed Fannie Mae and Freddie Mac to accept such valuations, it is difficult to evaluate their effectiveness without such examinations.

Mortgage rates managed to have a nice, boring Friday with minimal movement.  That’s a victory considering yesterday saw a decent move lower, but victories are eternally tempered by the long term chart as long as the long term chart looks like this: Not a fun chart, but look at it this way: the higher we go, the closer we are to the top.  That may sound like a meaningless platitude, but there’s a real kernel of logic behind it.   We know that the Fed hikes short term rates (which filter through to longer-term rates like mortgages) in order to crimp economic demand and bring prices lower.  In that sense, higher rates do indeed bring about lower rates. This is an interesting and important time for that thesis, as a matter of fact.  In the past few weeks, the Fed has increasingly flagged the sharper rise in longer term rates as evidence that it doesn’t need to hike short term rates anymore.  The Fed has also said it is hearing talk of economic softening that’s not yet showing up in the data.   This comes at a critical moment for a few reasons.  First off, longer term rates actively bounced against an important ceiling over the past two weeks.  The following chart shows it in terms of 10yr Treasury yields, the most commonly used benchmark for longer-term rates. While the chart is labeled with 4.99, this is really about the big psychological impact of “5% Treasury Yields!”  Some investors think that’s an attractive entry point to buy bonds.  Others simply think it’s a big psychological level and thus time to get sideways before the next big dose of motivation arrives.

Things have been eventful this week, to say the least, especially when considering the level of volatility relative to the underlying market movers in play.  We’ve talked a bit about why we’re seeing that volatility and it makes fairly good logical sense (recent spike to long term highs, position squaring, Fed shiftiness, big unknowns ahead, etc).  In not so many words, this week’s big, sideways volatility is a logical set-up for what could be an incredibly consequential week ahead (Fed announcement, Treasury refunding, all the big-ticket data).  That leaves today as a less consequential epilogue and one in which bonds best outcome would simply be to sneak sideways into the weekend with little fanfare.

There has been no major or lasting reaction to either of this morning’s economic reports although that’s not a great surprise considering both were right in line with consensus.  The uptick in 1yr inflation expectations inside the consumer sentiment data is possibly alarming, but bond traders didn’t seem to care.