The markets had a muted reaction to the Federal Open Market Committee pause on raising short-term rates a week ago, Freddie Mac found.

Notes will be repaid through a modified sequential structure, which calls for the A-1 and M-1 through M-3 classes to receive principal on a pro-rata basis.

One important disclaimer right upfront: there’s no real need to concern yourself with recent day-to-day movement in mortgage rates if your goal is to witness something significant.  As we discussed yesterday, things have been very sideways and have exhibited a distinct lack of volatility. Today’s movement happened to be toward slightly higher rates.  It’s not a huge departure from yesterday’s offerings.  But because the recent range is so narrow, and because the past two days have seen rates move higher, we’re now closer to the highest rates of the month after seeing the lowest rates of the month on Tuesday.

Powell Says Old Things in New Ways and Bonds Don’t Like It

It was day 2 for Fed Chair Powell’s congressional testimony.  These are normally uneventful as any bombshells for the week are typically dropped in the previous day’s testimony.  But Powell put a different spin on things today thanks to one particularly worthwhile question in which he was asked to define what it meant for the economy to evolve as expected (an important definition considering this is the condition that has to be met for the Fed to proceed with the 2 additional hikes it thinks will probably be appropriate).  It turns out the bar isn’t as high as the market may have thought.  Bonds were already on the run due to hefty corporate issuance and Jobless Claims data that failed to inspire the same sort of surprise as the previous 2 weeks.  Powell’s relative hawkishness simply offered no objection to the selling pressure.

Econ Data / Events

Jobless Claims

264k vs 260k f’cast, 262k prev

Continued Claims

1.759m vs 1.782m f’cast

Market Movement Recap

08:37 AM Flat in Asia, initially weaker in Europe, but a friendly bounce followed the BOE announcement and Jobless Claims data.  10yr up just under 1bp at 3.736 and MBS down less than an eighth after accounting for illiquidity.

09:15 AM quick reversal into negative territory with little to blame apart from corporate debt issuance.  10yr up 5bps at 3.779.  MBS down just over a quarter point. 

02:01 PM Weakness leveling off in early PM hours.  10yr up 6.4bps at 3.791.  MBS down just over 3/8ths of a point.

03:41 PM MBS at lows, down nearly half a point.  10yr up 7.5bps at 3.802.

The reality of the home sales market is in the eye of the beholder these days and the just-released Existing Home Sales report doesn’t shed much light.  The National Association of Realtors (NAR) logged an annual pace of 4.3 million units, essentially unchanged from last month’s 4.28m and close enough to the median forecast of 4.25m.   Existing sales bottomed in January at 4.0m units, and you’d have to go back to 2010 to find anything lower.  The bounce back since then has lacked a certain sense of urgency, but that’s not a huge surprise given the persistence of mortgage rates near 7%.  A frequent observation is that the rapid rise in rates has homeowners reluctant to give up the low rates achieved in 2020 through early 2022, thus crimping supply and restricting sales. The housing market has certainly managed to post a lot more inventory at rates this high, but only have years of getting used to them (not to mention the fact that rates were still generally falling from the ultra-high levels of the early 80s at the time). A chart of actual sales (as opposed to inventory) versus mortgage rates suggests that the ultra-low rates achieved in 2020 through early 2022 also helped pull forward a few years worth of housing demand. All that having been said, those who continue to lament inventory being a bigger issue in the resale market certainly have a leg to stand on.  The difference in “months of supply” versus the new homes market is very enlightening in that regard. 

Have you heard the one about the 3.72-3.84 range?  While we haven’t seen much of the ceiling this week, the floor is getting a workout.  Yesterday afternoon saw 3.72 block a late day rally attempt.  Now this morning, it is serving as a springboard for a bounce back up toward the top of the range.  Blame can be assigned in some combination to Jobless Claims holding steady, elevated corporate issuance, and Powell’s ability to find new ways to say old things. 

What exactly did Powell say?  Here are a few bullet points:

FED CHAIR POWELL: A STRONG MAJORITY OF COMMITTEE FEELS THERE IS A LITTLE FUTHER TO GO WITH RATE HIKES (additionally, he mentioned his views aligned with the majority)
POWELL: HAVEN’T SEEN MUCH PROGRESS IN SERVICE-SECTOR INFLATION
POWELL: WILL BE APPROPRIATE TO RAISE RATES TWICE MORE THIS YEAR (if economy evolves as expected)
When asked what “as expected” means, Powell said: “Continued modest growth + continued cooling of labor market + continued cooling of inflation”

In other words, 2 more hikes doesn’t require inflation remaining stubbornly high or the economy showing signs of surprisingly resilient growth.  The Fed is actually expecting the labor market and inflation to cool while growth remains only “modest.”  

“So, HBO Max is now just ‘Max.’ Your move, Peacock.” Lenders continue to cogitate on their next moves as rates remain stubbornly high and inventory available for sale stubbornly low, and neither appears ready to change much any time in the near future. As I continue to visit with groups of lenders and vendors, lender’s overhead, and how comp figures into that, continues to be a hot topic. STRATMOR’s current blog is titled, “Compensation: Ever Changing,” and I asked STRATMOR CEO Lisa Springer about what lenders are doing in that area. “Lenders in increasing numbers are reaching out to STRATMOR to advise on compensation strategies from a holistic point of view, seeing how changes fit within the entire company. Management teams are thinking about structural changes and capitalizing on the opportunity to create win-win comp programs for both the employees and the companies.” In housing and inventory news, a recent real estate report from Zillow predicts 5% growth in home values this year. Housing inventory remains limited, which in turn continues to push property prices skyward and inflate home value appreciation. And sure you can read this list of hot new-home markets, and may even have branches in them, but do you have the products to offer those buyers? (Today’s podcast can be found here and this week’s is sponsored by MCT and its Hedge Advisory division. Download their recently released whitepaper, Mortgage Pipeline Hedging 101, for more information on hedging in today’s market. Today’s has an interview with Optifunder’s Carmel York that goes through a comprehensive overview of the warehouse lending space and current environment.)

The Consumer Financial Protection Bureau issued two reports analyzing banking and consumer credit trends in the South, where many rural areas are considered “banking deserts.”

But the Mortgage Bankers Association also raised the dollar volume that it predicts the purchase market will originate this year.

Both loan volumes and interest rates came in mostly flat, but the jumbo average ran ahead of the conforming for the second week in a row, the Mortgage Bankers Association said.