War Protest: Bond Market Edition

There’s no quicker way to classify the movement we’ve seen over the past 2 weeks. The market is actively protesting the war in Iran–not because it’s a sentient being that cares about violence, but rather because the implications for inflation, economic uncertainty, and Treasury issuance on not great. There weren’t even any major developments today–just a few newswires that suggested no end in sight for the conflict or the closure of the Strait of Hormuz. 10yr yields are quickly back up to early Feb levels, but the selling is being led by the short end of the curve with 2yr yields at the highest levels in more than 6 months.

Econ Data / Events

Building Permits (Jan)

1.376M vs 1.41M f’cast, 1.455M prev

Continued Claims (Feb)/28

1,850K vs 1850K f’cast, 1868K prev

Housing starts number mm (Jan)

1.487M vs 1.35M f’cast, 1.404M prev

Jobless Claims (Mar)/07

213K vs 215K f’cast, 213K prev

Trade Gap (Jan)

-54.50B vs $-66.6B f’cast, $-70.3B prev

Market Movement Recap

08:30 AM Roughly unchanged overnight. No reaction to econ data. MBS up 1 tick (.03) and 10yr down half a bp at 4.223

11:33 AM Weakest levels. MBS down a quarter point. 10yr up 2.7bps at 4.254.

02:03 PM Back to weakest levels after a very modest attempt to recover. MBS down a quarter point again and 10yr up 2.6bps at 4.253

03:29 PM More selling around the 3pm close. MBS down 3/8ths and 10yr up 4.3bps at 4.27

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The bond market doesn’t look like it can catch a break as long as war persists in Iran. If it’s not oil, it’s fertilizer, nat gas, military spending, or a host of other inflationary knock-on effects that bode ill for the fixed income sector. Yes, the implied economic fallout would help offset the inflationary impulses, but not enough for rates to make downward progress just yet. Bonds will need to get past the point of pricing in another big inflation reckoning for that to happen. Until then, downward progress will be tough to sustain. This morning’s headlines (which involve more reports of mines in shipping channels and a Trump comment that said military objectives were more important than oil prices) have pushed the June Fed rate cut outlook to its worst levels in a year. 10yr yields are easily back up and over the 4.20% technical level. 

A near-record share of homeowners unable to sell their properties are renting them out instead, with “accidental landlords” accounting for 2.3% of listed rental stock in October, per Zillow data.

Agency MBS investors have had limited information about primary loans coexisting with home equity products, and may want to get more now, according to Experian.

Some of the best mortgage companies to work for discuss how they incorporate community service in their plans and the resulting business and personnel benefits.

Radian Group was looking to sell the aggregator, along with its title and real estate units, following a business model pivot related to the Inigo buy.

Residents in more than half of U.S. counties need greater than one-third of income to successfully manage major housing costs, according to new Attom research.

Mortgage rates moved higher on Wednesday despite only a modest increase in oil prices. The latter is currently a part of any conversation about interest rates as higher energy costs have fueled inflation expectations. Higher inflation begets higher rates, all else equal. But rates take other cues, or course. One key consideration is that of “supply.” In other words, how many new dollars of debt are being issued–not just by the U.S. government, but across the entire bond market.  At present, government issuance is high and only expected to get higher. Even though congressional approval is ultimately required, armed conflict can increase expectations for future military spending. There’s also uncertainty over tariff refunds which would further increase the supply of U.S. Treasuries to offset the lost revenue. Last but not least, this week brings scheduled Treasury auctions. The market knew about these ahead of time, but on some auction weeks, the results reveal an imbalance between buyers and sellers that increases momentum toward higher or lower interest rates. This week, that momentum has been generally higher. The net effect on mortgage rates is a conventional top-tier 30yr fixed that is back to February 4th levels on average. 

General Selling Spree Continues

It hasn’t exactly been perfectly linear, but the month of March has generally been a one-way trade for the bond market. In less than 2 weeks, 10yr yields are up from 3.95 to 4.22+ without any provocation from econ data. Today was another example as CPI came in right in line with forecasts. Despite that apparently decent news, yields rose steadily throughout the morning, and we can’t really blame oil prices today (even if higher energy costs are assumed to be very much on the bond market’s mind). Newswires the war costing $11bln last week also don’t help, especially on a day where bond traders are already thinking about Treasury supply due to the auction cycle. MBS sold off proportionally in the morning and underperformed in the afternoon, thus making for the highest 30yr rates in over a month and one of the biggest daily jumps we’ve seen in a while. 

Econ Data / Events

m/m CORE CPI (Feb)

0.2% vs 0.2% f’cast, 0.3% prev

m/m Headline CPI (Feb)

0.3% vs 0.3% f’cast, 0.2% prev

y/y CORE CPI (Feb)

2.5% vs 2.5% f’cast, 2.5% prev

y/y Headline CPI (Feb)

2.4% vs 2.4% f’cast, 2.4% prev

Market Movement Recap

08:41 AM Weaker overnight and no reaction to CPI. MBS roughly unchanged. 10yr yield up 2.5bps at 4.185

12:37 PM Weakest levels at noon ET and bouncing back a bit since then. 10yr up 4.5bps at 4.205. MBS 2 ticks (.06) off the lows, but still and eighth below rate sheet print times. 

04:28 PM weakest levels of the day. MBS down more than a quarter point and 10yr up 6.2bps at 4.22