The Office of the Comptroller of the Currency granted federally chartered banks permission Monday to close branches in California, Nevada and Arizona affected by Tropical Storm Hilary.

Another Day in The New, Higher Rate Reality

“Higher for longer,” they said.  And they weren’t kidding.  After the mini banking crisis in March, rate watchers were hopeful that this visible consequence of the rate surge meant that a big corner had been turned in the big picture.  But in May and June, the Fed was increasingly unconcerned with bank risks while they continued reiterating the “higher for longer” messaging.  Markets were slow to take them at their word, but the surprisingly “not bad” economic data in July and August has worked to change some opinions.  There have been some complicating factors over the past 2 weeks, but rising rate momentum is still mostly about the economy. As such, it’s the economy that will need to demonstrate a shift before we see meaningful relief.  Until then, the path of least resistance is the path we’ve been seeing.  Today was just another day on that path.

Market Movement Recap

09:34 AM Weaker in Asia and Europe overnight.  Modest follow-through so far.  10yr up 6.3bps at 4.314.  MBS down 14 ticks (.44).

12:45 PM More weakness into the noon hour, but stabilizing since then.  10yr up 8.7bps at 4.338.  MBS down 3/8ths.

03:11 PM little-changed from the last update (perfectly unchanged, in fact), and very flat over the the past 2 hours.

Interest rates are based on trading levels in the bond market.  Bond traders began their day looking at significantly weaker levels (i.e. higher yields/rates) versus last Friday, but for no apparent reason.  Actually, it would be more fair to say “for no new reason.” Reasons for the rising rate momentum are apparent and ongoing.  Decades-high inflation required decades-high rates to fix.  The higher rates are supposed to be damaging the economy more than they have.  Until that damage shows up, rates have a green light to continue higher. As more and more market participants abandon their preconceived notions regarding an imminent rate reversal, the upward momentum takes on a certain glacial quality.  In other words, it’s self-sustaining, often resulting in days like today where rates look like they’re acting on some obvious catalyst despite the absence of any such news. Mortgage rates were already new 7.4% by the end of last week and today’s increases bring the average lender closer to 7.5%.  This is the highest since late 2000.   Lower rates are still available for certain scenarios and discount points, but many scenarios are also seeing higher rates.

The new week begins with bond yields at the highest levels since 2007 in what has been a broadly linear uptrend since late July.  Up until that point, rates had been holding in a narrow range for months more than 50bps below current levels. If the Fed was/is “data dependent,” and if the most recent NFP/CPI reports were arguably bond-friendly, why has the trend been so unfriendly? 
Data has indeed mattered, but the bond market’s strategic shift has mattered more.  In early July, markets returned from the Independence Day holiday to find a hawkish Fed Minutes release on Wednesday and a glut of unfriendly data on Thursday (including that ADP that came in at 497k).  This culminated in the first of two “apprehensive and defensive” sell-offs highlighted in the chart below.

In both cases, the selling pressure was driven by data and the Fed in the run up to NFP.  In both cases NFP helped calm the bond market’s nerves with CPI solidifying the friendly bounce in the following week.  In the most recent example, the post-CPI resolve lasted only a few hours before bonds were blasting back toward the previous week’s highs.  At the time, losses were exacerbated by Treasury supply concerns and foreign central bank selling in China/Japan.  
Fed policy is hurting long-term rates due to the yield curve.  Short-term rates are now high enough to hold mostly flat.  Until now, stronger data was able to do more to push Fed rate expectations (and 2yr Treasury yields) rapidly higher.  Higher rate expectations + the reality of tighter policy were like offsetting penalties for longer-term rates, thus allowing them to remain in a range.  But with the Fed shifting gears on short-term rates, bond market influences have a more direct impact on longer-term rates–all at a time when supply is increasing, foreign governments are selling, and the Fed is saying it’s fine cutting short-term rates in the future while continuing to shrink the balance sheet.
To all of the above, add the fact that other economic data suggests the economy continues to chug along.  Some of the data suggests things are quite a bit stronger than expected.  The balance of all the available econ data adds general pressure (i.e. it supports the strategic shift to higher rates). 
Last but not least, there is buzz around the topic of the “neutral rate” or “R-Star” moving higher (the imaginary level of the Fed Funds Rate that keeps inflation and growth in a balanced homeostasis).  Some of the proponents of said buzz think Powell will discuss this Friday in Jackson Hole.  While a discussion wouldn’t be a surprise, it would be a surprise if Powell were to say something about it moving higher.  If anything, there’s an opportunity for Powell to put some of the rumors to bed by reiterating recent Fed communications regarding the absence of any change in the R-Star outlook.  At the very least, that would let us know how much this sentiment has affected the uptrend in yields recently.

For those attending the Western Secondary, remember, it never rains in Southern California. Except for now. Here’s one person who won’t be seeing So Cal any time soon, and dare I say, every honest person in our biz is happy when this happens. Daniela Rendon, 31, was a Miami real estate broker but was sentenced to three-and-a-half years in prison for stealing $381,000 in COVID relief funds, wire fraud, money laundering, and identity theft. Rendon probably won’t care too much about what the Federal Reserve does while she’s working in the laundry room or serving up oatmeal, but the Fed will probably restate, through Chairperson Powell speaking at the end of the week, its intent to keep interest rates high for an extended period to make sure inflation does not flare up again. In other legal and compliance news, Freedom Mortgage’s RESPA Consent Order with the CFPB is getting some attention from Mortgage Musings author and attorney Brian Levy. (Today’s podcast can be found here and this week’s is sponsored by PHH Mortgage. For over 30 years, PHH Mortgage has provided industry-leading mortgage services and helped countless homebuyers and homeowners find financing solutions to meet their needs. Hear an interview with Arrive Home’s Matt Pettit on down payment assistance programs and the push for more affordable housing.) Lender and Broker Software and Services If you’re in Dana Point for CMBA Western Secondary, you may be able to spot a blue whale lobtailing or a playful pod of dolphins on the water. But inside the Waldorf Astoria, there is ample opportunity for a type of spectating to help you run your business better. On Wednesday at 11 am PT, grab a seat for the engaging session, “How is Technology Providing Efficiencies in the Secondary Market.” Jay Arneja of SimpleNexus, an nCino company, will be weighing in on a wide range of technology options that can make your firm nimbler during a time of market volatility. If you can’t make the show, check out this blog on how different types of eClosings can save you $160-$440 per loan.

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The bank developed its cloud-based Ally.ai platform within months. Now it has rolled out its first use case: summarizing customer service calls so the agent doesn’t have to multitask.

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The post-close review timeline gets shorter and new pre-funding checks become required on Sept. 1.