We already know that bonds are especially sensitive to economic data right now, and we knew that today offered an uncommonly condensed schedule with several big ticket market movers arriving on the same day.  We even suspected that yesterday’s seemingly inexplicable weakness could have been the market’s way of bracing for the risk that this morning’s data would prompt more selling.  As it happened, this morning’s data did exactly that, and then some.
Bonds seem most concerned with the ADP employment data (497k vs 228k f’cast).  While it’s far from a perfect predictor, it speaks to the risk of a similar beat in the big jobs report tomorrow.  The result is the typical “Fed accommodation trade” with stocks and bonds losing ground together. 

Apparently China is not paying interest on its sovereign debt… What is it waiting for? If you’re waiting for lower rates to give your business a “shot in the arm,” the next few months may be difficult, but there is good news. The persistence of stubborn inflation is causing U.S. and European officials to tighten monetary policy. With both the Federal Reserve and the European Central Bank expected to raise interest rates in July, an aggregate measure of borrowing costs indicates a peak of 6.25% in the current quarter, highlighting a shift from the previous projection of 6%. Despite that, new home sales are surging, home prices are rising, and prospective buyers are engaging (as if they ever stopped) in bidding wars again. But U.S. housing prices have led to higher shelter costs and complicate the Federal Reserve’s fight against inflation. Barron’s discusses this in, “How a Housing Rebound Could Impact the Fed’s Path Forward.” Is the huge overhang of housing supply from the 2000-2007 housing bubble not fully absorbed? Yes, higher rates have impacted affordability, but, historically, LOs know that high rates don’t necessarily impact peoples’ desire to own a home. If rates go up a lot, good LOs will help with good programs, and some people will buy smaller homes. But they will still buy homes. (Today’s podcast can be found here and this week’s is sponsored by Gallus, the premier business intelligence tool for the mortgage industry. With hassle-free insights and user-friendly functionality, Gallus empowers you to make faster, data-driven decisions for enhanced profitability. Hear an interview with Jeremy Potter on the shift toward innovative lending practices and new underwriting standards.)

The volume of mortgage applications fell during the last week of June as compared to the prior week which had contained an adjustment to account for the Juneteenth holiday. The Mortgage Bankers Association (MBA) reported a decline of 4.4 percent in its seasonally adjusted Market Composite Index. The change ended a three-week streak of volume gains. On an unadjusted basis, however, that index did move 6.0 percent higher. The Refinance Index decreased 4 percent from the previous week and was 30 percent lower than the same week one year ago. The refinance share of applications ticked up to 27.4 percent from 27.2 percent. [refiappschart] The seasonally adjusted Purchase Index declined 5.0 percent but was 6.0 percent higher before adjustment. Applications were down 22 percent from the same week in 2022.   [purchaseappschart] “Mortgage applications fell to their lowest level in a month last week as rates for most loan types increased. As mortgage-Treasury spreads remained wide, the 30-year fixed rate increased to 6.85 percent, the highest rate since the end of May,” according to Joel Kan, MBA’s Vice President and Deputy Chief Economist. “ Purchase applications decreased for the first time in a month, as homebuyers remained sensitive to rate changes. Rates are still over a percentage point higher than a year ago, and housing affordability is still a challenge in many parts of the country. However, the average loan size for a purchase application declined to $423,500 – its lowest level since January 2023. This was likely driven by reduced purchase activity in some high-price markets and more activity in some of the lower price tiers as buyers searched for more affordable options.”  

Rising interest rates are putting pressure on multifamily housing borrowers — especially lenders who got into multifamily lending looking for a quick return.

This agreement comes approximately one month after the REIT agreed to buy Arlington Asset Investment.

The new review requirements are set to go into effect in mid-September and will replace temporary guidance put in place following a 2021 building collapse.

High vacancy rates in U.S. office markets and the impact of rising interest rates on property values in Europe have prompted a brutal selloff in publicly traded real estate stocks and bonds.

The Home Loan banks are failing to serve huge numbers of Americans because of their reliance on outdated credit scoring models.

While the mainstream mortgage rate indices continue operating in the mid-to-upper 6% range, actual rates are moving higher into the 7% range by the time we account for the additional costs required to get the average lender into the high 6’s.  In other words, a 30yr fixed rate in the 6’s is most often seen with the addition of upfront costs to buy down the rate these days.  Because those upfront costs can vary from scenario to scenario, our index accounts for them in the rate itself, thus allowing us to track just one number that is always able to be compared to other points in the past. At the moment, there are only a few days in the recent past (May 25th and 26th) that have seen rates any higher than todays.  Before that, you’d have to go back at least another 2 months.  Even then, you wouldn’t get to obviously higher rates until late 2022. Today’s increase wasn’t that big in and of itself.  It simply added on to a losing streak that began last Thursday after several economic reports suggested more resilience than expected.  In general, an unexpectedly resilient economy puts upward pressure on rates. Fears about “more of the same” could be behind some of today’s weakness as the next two days bring several important economic reports.  Ultimately, inflation and the economy will determine when the tide turns for rising rate momentum. 

It may be Wednesday–a day that typically marks the midpoint of the bond market’s work week–and it may be the week of the month with several of the biggest-ticket economic reports, but today fills the role of summertime Monday due to the oddly-timed holiday schedule that saw a half day on Monday proper followed by Tuesday’s full closure.  The result is an ultra-condensed data week with virtually all of the relevant happenings set for Thu/Fri.  The only exception is today’s release of the Fed Minutes, but it’s hard to imagine any major revelations coming out of that in light of the Fed communications we’ve received since the last meeting.
The short end of the yield curve has been trending steadily higher since early May and is once again approaching levels that make the yield curve the most inverted its been in decades.  This is a reflection of the Fed’s rate outlook.  10yr yields are arguably being pulled higher against their will (and still trying to hold supportive ceilings, even if those ceilings are higher than they were last week).