Bonds Calmed Down After Early Weakness

This week’s relevant economic data is concentrated over the Tue-Thu time frame with Wednesday’s CPI being the most obvious headliner. Today’s session offered little by way of new information but nonetheless provided some insight as to how the market would approach this week’s data. In a nutshell, bonds remain defensive. The burden of proof remains on weaker economic data or lower inflation if we’re hoping to make a case for lower rates. “Dip buyers” are not looking eager to to step in front of the train of generally weaker momentum.  All that having been said, things certainly could have been worse today and it was some small solace that bonds leveled off after early weakness and ended up almost sideways on the day.

Econ Data / Events

Nonfarm Payrolls

256k vs 160k f’cast, 227k prev

Unemployment Rate

4.1 vs 4.2 f’cast, 4.2 prev

Market Movement Recap

09:23 AM Slightly weaker overnight but back near unchanged now. MBS unchanged. 10yr up 0.3bps at 4.767

11:21 AM Lows of the day, down an eighth in MBS.  10yr yields up 4bps at 4.805

02:08 PM Bouncing back to nearly unchanged territory.  MBS down 1 tick (.03) and 10yr up 1.4bps at 4.779

04:05 PM Sideways since the last update.  MBS down 2 ticks and 10yr up 2.4bps at 4.789

The former president of the servicing giant stepped down from his previous role in early 2024 but continued to hold board positions at parent and partner businesses.

The Consumer Financial Protection Bureau issued separate policy statements on “sandbox approvals” and no-action letters for fintechs — measures whose longevity is questionable with the incoming Trump administration.

The Palisades fire, stretched across an area larger than Manhattan and where the median home price approaches $4 million, has damaged or destroyed more than 5,000 structures.

In a speech outlining his priorities for the FDIC, Vice Chair Travis Hill stressed the need for a more flexible regulatory approach, addressing capital requirements, digital assets, climate policy, and bank oversight, while emphasizing transparency and timely action.

Even though senior home values are still near the all-time high, other data shows fewer are turning to reverse mortgages to ease a potential financial crunch.

Mortgage rates were already at 6 month highs earlier this week so it didn’t take much of a push to send them up to new 7 month highs today. The push in question came from today’s hotly-anticipated jobs report. No other economic report has as much consistent potential to cause volatility for interest rates.  As such, when today’s job creation headline came in at much higher levels than expected, it was an easy decision for traders to push rates to higher levels. The average top tier 30yr fixed rate was closer to 7.125% yesterday. After today’s route, that rate is now almost perfectly centered on the 7.25% level (mortgage rates are typically offered in 0.125% increments). These are the highest levels since May 2024. From here, the pain could continue if next week’s data sings a similar tune. While not as consistent a market mover as the jobs report, Wednesday’s Consumer Price Index (CPI) is the only other economic report that’s in the same league. A particularly balmy inflation reading could easily push rates up another 0.125%–possibly more.  Conversely, a sharply lower inflation reading could be worth just as much of a recovery.

2024 has been one of those “it is what it is” sort of years for activity in the mortgage market.  There were signs of hope over the summer months as rates fell enough to make for a noticeable spike in refinance activity.  But with the rapid reversal starting in October, refi demand is right back in line with long term lows according to the Mortgage Bankers Association’s (MBA) refinancing index. It’s hard to see in the chart, but this week’s survey actually showed a modest increase over last week, the difference is inconsequential as both are effectively the lowest levels since late 2023. The purchase side of the market has been less eventful, but no less depressing. This application data was collected well before this week’s jobs report and subsequent rate spike.  As such, we wouldn’t expect any resilience in next week’s numbers.  On the brighter side, present levels are so repressed that we also wouldn’t expect much more of a contraction.

Sizeable, Straightforward Selling Spree

Today’s jobs report was much stronger than expected and there were no compelling counterpoints to give traders any second thoughts.  As such, traders proceeded logically by dumping bonds.  Trading levels hit the 3pm close very close to the levels seen immediately after the jobs report and there wasn’t much fanfare in between. All in all, a reaction that was as straightforward as it was unpleasant.

Econ Data / Events

Nonfarm Payrolls

256k vs 160k f’cast, 227k prev

Unemployment Rate

4.1 vs 4.2 f’cast, 4.2 prev

Market Movement Recap

08:47 AM big selling after data.  MBNS down half a point.  10yr up 8.9bps at 4.773

10:31 AM Decent recovery in Treasuries with 10yr yield now up only 4.8bps at 4.734.  MBS down 14 ticks (.19).

02:42 PM MBS as new lows, down nearly 5/8ths.  10yr up 8.1bps at 4.765

The morning trading is as straightforward as it is unpleasant.  Nonfarm payrolls crushed expectations (256k vs 160k f’cast) and the unemployment rate also improved (4.1 vs 4.2). While the Fed may have downplayed the role of the labor market in guiding the rate outlook at the last meeting, the jobs report will ALWAYS matter to the bond market.  If anything, the damage has been fairly limited relative to what it could have been, or even what it had been in the first few minutes after the data.  Nonetheless, yields have easily moved to their highest levels over a year.

The market has moved out to June for the next Fed rate cut expectation, and just barely.  Yesterday, there was only a 25% chance of no rate cut by June.  Today it’s 40.3%.  Current trading in Fed funds futures suggests only a 43.0% chance of a cut.

The 10am Consumer Sentiment data provided another hurdle for bonds, mainly due to the big jump in inflation expectations.  We’d take this with a grain of salt considering the many unknowns surrounding tariff implementation and impact.  Thankfully, it looks like bonds are doing to the same (i.e. not reading too much into it, despite a brief, initial reaction).