Big Round Trip in Oil Prices and Bond Yields

There was no denying the spillover from oil price volatility to the bond market this morning, even if it took quite a lot of the former to move the latter. At its apex, the oil surge was the largest daily move on record at over $26/bbl (just over a 28% jump). This translated to a 10yr yield jump of almost 8bps to start the overnight session. But things were already reversing course quickly by the time European trading began.  Then, by the start of U.S. trading, 10yr yields were already back below 4.18% and continued to fall back to unchanged levels at 4.13% by 2pm ET.  The reversal almost perfectly traced the reversal in oil prices.

Market Movement Recap

08:19 AM Sharply weaker overnight with oil price spike. High yields of 4.21% in 10yr.  Now up only 4.2bps at 4.171.  MBS down just under a quarter point.

10:48 AM Off the weakest levels. MBS down an eighth and 10yr up 2.8bps at 4.157

01:55 PM MBS back to unchanged.  10yr also unchanged at 4.13

One of the conversation topics late last week in Deer Valley is the weather and climate, and more specifically that Salt Lake City had received virtually no snow this winter, which means that places like Atlanta and Charlotte have received more snow than a city at 4,300 feet elevation. Syracuse, New York has received nearly 5 feet of snow so far this year. Ever heard of Commonspace in Syracuse? As another affordable alternative, it’s a “cohousing” community in a restored 19th century office building made up of 25 mini apartments help affordability and that remind me a lot of my college dorm life, which was pretty cool and fun. The “Bull Moose Project” launched a new housing affordability hub examining why homeownership is increasingly out of reach for working families, and, per the site, outlining specific policy levers the Trump administration could use to restore competition and affordability in the housing market. (Today’s podcast can be found here and this week’s ‘casts are sponsored by Floify, an industry-leading point of sale platform. The Dynamic Apps 2.0 AI-powered enhancement lets lenders tailor application flows by loan type, leading to higher completion rates, less operational back-and-forth and specialty lending without the one-size-fits-all compromise. Hear an interview with Rocket’s Austin Niemiec on the three-year strategic alliance with Compass aimed at expanding home listing inventory to create a significantly enhanced and affordable home buying and selling experience for American families.)

Since the outbreak of the military operation in Iran, there have been varying levels of spillover from rising oil prices to the bond market. There have been notable pockets of time where the correlation broke down, but when viewed in less granular detail, oil prices and bond yields have moved higher together over the past week. Now this morning, there’s a new mega-surge in oil (presumably due to Iran’s leadership announcement and its implications for more military escalation) and the correlation is undeniable when viewed over a short time period. Today’s first chart shows there’s no question of that short-term correlation. 

The second chart shows that the correlation is definitely not proportional (the scaling is set to the same proportions used last week in order to illustrate the size of the jump in oil).

Active listings grew 7.9% year over year in February, but just 0.2% month over month, reaching more than 914,000 homes on the market, according to Realtor.com.

While correspondent is still the bulk of Planet Financial’s production, growth of its servicing portfolio helped the company increase retention volume.

The industry welcomed the Department of Veterans Affairs’ plan for implementing legislatively-created borrower relief but some would like more clarification.

Proposed housing legislation aimed at curbing institutional homebuying could also block investment platforms that let everyday Americans own shares in rental homes, according to the CEO of Arrived.

President Trump’s criticism of large institutional investors prompted inclusion of a sales timeline for build-to-rent properties in the ROAD Act, which in turn pushed NAHB to withdraw its support.

Before this morning’s jobs report was released, mortgage rates were on track to end the week at their highest levels in several weeks. This was due to an ongoing mega-spike in oil prices spilling over to the bond market (higher oil = higher inflation implications, and bonds hate inflation). The jobs report saved the day, albeit in a morbid way. It was one of the weakest jobs reports in years with unemployment continuing to trend higher and the job count falling deeply into negative territory. The jobs market is the only thing as important to bonds as inflation, and job market weakness tends to push rates lower. Bonds recovered back to levels that were right in line with yesterday, thus allowing most mortgage lenders to adjust their rate offerings accordingly.

Oil Impact Ultimately Shunned in Favor of Jobs Report Implications

It was a super interesting day for the bond market. Yields rose to the week’s highs overnight as oil prices continued to surge. We knew we’d get at least some sort of reaction to any big beat/miss in the jobs report and today’s miss was certainly big.  At first, the reaction was logical. Bond rallied. But the paradox set in quickly and yields hit new highs by 9:30am. Fed funds futures continued arguing for a bond rally, as did lowest S&P levels since November. One could say “bonds finally came to their senses,” or “the initial selling was a quick bout of profit taking,” but no explanation would have been obvious upfront. Since 9:30am marked the shift, we’d have to go with the vague “positional considerations” and stock market safe haven excuses. Either way, with bonds ending up flat despite oil cracking $90/bbl, it was good enough.

Econ Data / Events

Average earnings mm (Feb)

0.4% vs 0.3% f’cast, 0.4% prev

Non Farm Payrolls (Feb)

-92K vs 59K f’cast, 130K prev

Participation Rate (Feb)

62.0% vs — f’cast, 62.5% prev

Retail Sales (Jan)

-0.2% vs -0.3% f’cast, 0% prev

Retail Sales Control Group MoM (Jan)

0.3% vs 0.2% f’cast, -0.1% prev

Unemployment rate mm (Feb)

4.4% vs 4.3% f’cast, 4.3% prev

Market Movement Recap

08:16 AM Additional weakness overnight amid ongoing oil surge. MBS down an eighth and 10yr up almost 3bps at 4.164

08:35 AM post payrolls, 10yr yields down 1.5bps at 4.121 and MBS up 2 ticks (.06). 

10:09 AM Big reversal into weaker territory. MBS down 6 ticks (.19) and 10yr up 4bps at 4.176

11:59 AM Nice recovery with MBS down only 1 tick (.03) and 10yr down 0.3bps at 4.133

02:03 PM Best levels of the day. MBS up 2 ticks (.06) and 10yr down 2.3bps at 4.113

03:21 PM Off the best levels now with MBS down 2 ticks (.06) on the day and just over an eighth from the highs.  10yr roughly unchanged at 4.138