Bonds are selling off for no obvious reasons for however many days in a row it’s been (at least 2 unless you count last Thursday). Episodes like this result in bond analysts dusting off phrases like “the path of least resistance”–typically only ever seen with selling pressure.  This path arguably began in early December after the jobs report failed to push 10yr yields sustainably below 4.17. One could even say it began with the jobs report in early October that singlehandedly obviated any urgency on the part of the Fed to address some sort of troubling slide in the labor market.  At the very least, the most recent leg of weakness can be thought of as the path of least resistance in light of last week’s Fed announcement/dots/press conference. 
The act of pushing the rate cut outlook farther into the future and/or of declaring a higher neutral rate is consistent with “steepening” of the yield curve.  That’s a fancy word that means 10yr yields are moving higher relative to 2yr yields, or that 2yr yields are falling faster than 10yr yields.

Bottom line, there was a chance that a floundering labor market would accelerate the rate cut outlook, sticky inflation be damned.  October’s release of NFP meant that the focus could shift back toward sticky inflation, and subsequent inflation reports confirm there’s no reason to rush additional hikes.  Combine that with some unknown risk that fiscal changes continue to juice the economy and we’re right back to the “higher for longer” mentality that dominated the discourse last year.
Don’t lose hope though.  Things can change, but it will take a noticeable shift in the inflation data, or another troubling swoon in labor metrics.  Either way, the path of least resistance can’t really change until we actually get those reports in the first 2 weeks of January, and even then, it would take a few months in succession to really make a case for a shift. There’s also some hope from the outright level of yields, which began to bring out value buyers the last time 10yr Treasuries moved into the upper 4% range.
(NOTE: MBS Live is on holiday half-day protocol today.  That means this morning’s commentary is also the closing commentary unless something really crazy necessitates additional coverage.  Updates/alerts will only go out in the event of extreme movement. As always, MBS Live members can set up multiple automated alerts (here) if you’re actually making intraday lock decisions today.)

In the news, besides American Airlines grounding all flights (it’s back running now), is Burt, the 90-year-old crocodile from Crocodile Dundee, dying yesterday in Australia. My guess is that he’s long retired from doing much of anything. What do retired mortgage bankers do, besides immediately considering re-entering the business? Here’s one solution from Minnesota. Others travel. Millions sit down in their fancy seats and start flipping through the movies on the screen in front of their nose. Where do they come from? (The movies, not the noses.) Small teams at the airlines make decisions on what gets added to the library. Delta has a team of four that decides what gets onto 165,000 screens on 840 jets, Southwest has a single person picking what makes it onto their media servers, United has a team of eight picking what goes on in the 500 planes where it has seat-back screens. American carries 1,500 titles overall and averages 500 movies and tends to add 200 new titles a month. The best/most popular airline movie (yes, they watch what you watch) is Crazy Rich Asians.  Employment; lender wanted “Evergreen Home Loans® is seeking to acquire a midsized mortgage company that shares our values and commitment to exceptional customer service. With over 37 years of experience, Evergreen is dedicated to helping homeowners achieve their dreams through innovative loan products and a people-first approach. We will take care of your Loan Officers and provide them with the tools to succeed, creating an environment where they can thrive. This acquisition is an opportunity to join forces, combining strengths to achieve lasting success and expand our reach. All inquiries will be handled confidentially. If your company is interested in exploring this opportunity, please contact Evergreen’s founder, Don Burton, directly. (206.300.9965) Let’s build a stronger future together!”

The watchdog accuses Rocket Homes and The Mitchell Group brokerage of initiating a plan to generate origination business for Rocket Mortgage.

The Federal Reserve will seek comment on the current stress-testing regime with an eye toward increasing transparency and reducing volatility. Modifications would not go into effect until at least 2026.

Fifteen percent of residences had three or more structures, which can go undetected by insurers even when they identify a secondary structure.

The scorecard the Federal Housing Finance Agency draws up yearly applies to two influential loan buyers and an entity overseeing the fungibility of their bonds.

A Washington, DC tax accountant pleaded guilty for submitting falsified documents in his application for a $1.4 million purchase loan, which he later received.

The most interesting analysis we can offer today is a simple reminder that the word “idiosyncrasy” has an “S” at the end instead of the “C” that we’re all thinking it should have.  Speaking of idiosyncrasies, holiday weeks–particularly those for Thanksgiving and X-mas–tend to have some! At the simplest level, this just means that we shouldn’t read too much into any seemingly counterintuitive volatility. Bonds can go either direction for what seems like no real reason.  Lighter volume and liquidity make it easier for any given trade to move the market.  So far today, of the 3 people trading bonds, 2 are sellers, so yields are higher even though econ data came out weaker.

Those who spend any time digging into home construction and home sales figures in the U.S. know that, of the 4 census divisions, the South accounts for about twice as much activity as the other 3 regions combined.  For example, in data released today for the month of November, the South accounted for an annual pace of 417k new home sales out of a nationwide total of 664k ( 62% of the total) Two months earlier, the South accounted for 472k out of 736k (64% of the total). But in October, it was only 366k versus a 627k (58% of the total). In other words, the South wasn’t pulling its typical weight in bolstering new home sales. There’s no need to overanalyze a simple phenomenon.  Major weather events and/or natural disasters routinely show up in housing market data.   The following table shows the regional breakdown with the obvious drop-off in October in the south.   While it was only a 13.9% improvement from October, the outright numbers are so large in the South that they more than made up for the 41% decline in the Northeast and the 7.5% decline in the West, ultimately helping the national numbers bump back up by 5.9%. In outright terms, the 664k annual pace matches the 2nd lowest level of the year seen in January.  October was the only month that was lower.  But even then, October and every other month of the past 1.5 years have fallen inside a narrow sideways range. This lukewarm bowl of porridge is emblematic of much of the data pertaining to new home construction and sales recently.  Activity is down from the post-pandemic peak, not making any moves for better or worse, but still in respectable territory relative to pre-pandemic levels.

Steady Selling in Bonds. ‘Tis The Season?

Bonds began the day in weaker territory and continued to sell off through 2pm ET despite an absence of any obvious justifications.  That said, ’tis the season for bonds to move whichever way they want without any obvious justifications.  Volumes were as low as you’d expect for X-mas week, if not slightly lower. Treasuries are in a cautious stance, having been tasked with underwriting several huge shorter term auctions on X-mas week, and less than one week after a big dust-up with the Fed.  It’s basically the bond market version of “sell in May and go away,” except May is December. 

Market Movement Recap

08:39 AM modestly weaker overnight, mostly after Europe opened.  MBS down 2 ticks (.06) and 10yr up 3.5bps at 4.549

10:16 AM Weaker over the past 45 minutes.  MBS down 7 ticks (.22) and 10yr up 5bps at 4.564

03:03 PM Weakest levels of the day with MBS down 10 ticks (.31) and 10yr yield up 7.7bps at 4.592