Mortgage groups want GSEs to buy MBS to lower rates, but the Chairman of Whalen Global Advisors writes that the plan is risky, unnecessary, and poorly timed.

Another Hawkish Powell Press Conference Harshes Bonds’ Mellow

The Fed cut rates and ended QT.  Neither were surprises for markets and neither had an impact.  The press conference was hawkish, however, with Powell saying a December cut was far from a foregone conclusion.  This is very much counter to the market’s expectation that a December cut was a lock.  Fed Funds Futures tanked and yields surged about 8bps in the 10yr.  MBS lost about 3/8ths and negative reprices continue to roll in.  

Econ Data / Events

Case Shiller Home Prices-20 y/y (Aug)

1.6% vs 1.9% f’cast, 1.8% prev

CaseShiller 20 mm nsa (Aug)

-0.6% vs — f’cast, -0.3% prev

FHFA Home Price Index m/m (Aug)

0.4% vs 0.1% f’cast, -0.1% prev

FHFA Home Prices y/y (Aug)

2.3% vs — f’cast, 2.3% prev

CB Consumer Confidence (Oct)

94.6 vs 93.2 f’cast, 94.2 prev
Labor differential: 9.40 vs 7.80 prev

Market Movement Recap

10:26 AM modestly weaker overnight and holding steady so far.  MBS down 1 tick (.03) and 10yr up 1.6bps at 3.992

01:28 PM 10yr yields are up 2.9bps at 4.005 and MBS down 3 ticks  (.09)

01:41 PM MBS now down 5 ticks (.16) and 10yr up 3.5bps at 4.012

Today was not a foregone conclusion and there was no way to know ahead of time that it would end like this, but the outcome is exactly why we’ve gone to such lengths to warn you about the potentially paradoxical reaction to a Fed rate cut.  Too many people repeat the fallacy that mortgage rates will benefit from a Fed cut.  We have several recent examples of the exact opposite happening, and now today adds another strong reminder with the average lender moving higher at the fastest pace since the day after the last Fed meeting. Why does this happen?  It has nothing to do with the rate cut itself.  As we warned, volatility would come from Fed Chair Powell’s press conference. In today’s case, Powell said that another rate cut in December was not a foregone conclusion.  This was at odds with the market’s expectations, so there was a rush to reprice those expectations.   As always, today’s rates instantly adjust to expectations for rates in the future (the main reason that Fed rate cuts do little-to-nothing to impact market rates).   In relative terms, rates are still lower than most of the past year, but back up to similar levels seen on October 14/15th. 

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Modestly Stronger Ahead of Fed Day

Without any market moving econ data on Tuesday, bonds finally managed to find a bid.  Or at least that’s how it seemed during domestic hours.  When considering the overnight session, we actually saw yields hit their lows of the day before the open, sell-off a bit at 8:20-8:40am surrounding a weekly employment update from ADP, and then return to the best levels mid-day.  The 7yr auction was slightly weaker, but bonds didn’t mind (perhaps just relieved to have supply in the rearview). With tomorrow’s Fed cut a 100% certainty, volatility potential depends on Powell’s press conference as well as whether or not the Fed makes any sort of announcement to end quantitative tightening (something that has been increasingly speculated by trade desks).  The QT news wouldn’t be as big as it sounds, but it might help a bit (or hurt a bit if it’s not announced).

Econ Data / Events

Case Shiller Home Prices-20 y/y (Aug)

1.6% vs 1.9% f’cast, 1.8% prev

CaseShiller 20 mm nsa (Aug)

-0.6% vs — f’cast, -0.3% prev

FHFA Home Price Index m/m (Aug)

0.4% vs 0.1% f’cast, -0.1% prev

FHFA Home Prices y/y (Aug)

2.3% vs — f’cast, 2.3% prev

CB Consumer Confidence (Oct)

94.6 vs 93.2 f’cast, 94.2 prev
Labor differential: 9.40 vs 7.80 prev

Market Movement Recap

10:38 AM 2 way volatility early.  MBS back to unchanged.  10yr still weaker, up 1.8bps at 3.993

12:52 PM MBS up 1 tick (.03) and 10yr up just under 1bp at 3.983

02:11 PM minimal reaction to 7yr auction.  It was slightly weaker than expected, but yields are a hair lower since before the auction.  10yr up 0.6bps at 3.98 and MBS still up 1 tick (.03). 

04:19 PM Heading out at the best levels of the day with MBS up an eighth and 10yr down 0.2bps at 3.973

First off, bonds are doing fine this morning.  10yr yields are technically higher on the day, but only when compared to yesterday’s 5pm levels.  As far as most trade desks are concerned, 3pm is the closing time for Treasuries, and against that benchmark, we’re slightly stronger on the morning.  MBS are stronger still, almost certainly because they don’t have to concern themselves with the digestion of $183bln of new issuance over the first 2 days of the week (unlike Treasuries). With that in mind, keep an eye on today’s auction results (typically 1:02pm, despite the 1pm official time). Bonds will either be seeing some post-supply relief, or simply locking into whatever the pre-Fed positioning trade may be.

Bonus chart: Labor Differential (a metric inside the consumer confidence numbers that shows the spread between those who view jobs as being plentiful vs those who say jobs are “hard to get”). It’s hard to see in the chart, but that 9.40 reading is up slightly from last month.