Another Boring (But Resilient) Day

After the past few weeks, boring trading days aren’t necessarily unwelcome.  Their only real downside is that there’s not much to say about them.  Bonds are waiting for three things: more banking drama (or the progressive absence thereof), economic reports that flesh out the inflation picture, evidence that banking drama has actually had a measurable impact on the economy.  Only one of those things happens quickly, so it’s not too much of a surprise to see boring trading days with generally sideways momentum.

Econ Data / Events

Pending Home Sales

+0.8 vs -2.3 f’cast, +8.1 prev

Market Movement Recap

09:51 AM Roughly unchanged overnight.  Some early weakness, but mostly bouncing back–especially MBS.  5.0 coupons are actually 3 ticks (.09) higher on the day while 10yr yields are 2bps weaker/higher.

12:10 PM Bonds rallied during SVB testimonies.  10yr down 2bps at 3.553.  MBS up an eighth of a point.

01:19 PM modest losses after 7yr Treasury auction.  10s and MBS both unchanged on the day.  

03:07 PM MBS back near strongest levels with 5.0s up more than an eighth of a point.  10yr is roughly unchanged at 3.57%

For the second day in a row, mortgage rates didn’t move nearly as much as they have been moving on any given day during the past 3 weeks.  This is a reflection of calmer trading in the underlying bond market which is, in turn, a reflection of a lower volume of surprise developments in the banking sector. As boring as it may be, we’re really in a holding pattern until one of three things happens: more banking drama, economic reports that flesh out the inflation picture, evidence that banking drama has actually had a measurable impact on the economy.  Only one of those three things occurs on a regular schedule.  The other two are not only variable in terms of timing, but they may not even happen in the first place.  That makes the near-term outlook open to debate and highly dependent on unpredictable news headlines.  Otherwise, we’re waiting for the most important economic reports like the jobs report next Friday or the Consumer Price Index a week later. 

In the wake of bank failures earlier in the month, stock prices and bond yields had been highly correlated.  This is a more normal trading pattern for times when the market is trading “risk” as opposed to “Fed accommodation.”  This week has marked the biggest departure from that risk-on/off pattern–especially over the past two trading sessions.  This suggests markets are increasingly getting over bank contagion fears, but without rushing out of the bond market.

What do we make of this?  Not too much, necessarily.  Once could argue, the risk-on/off pattern is still more intact than not by pointing out that stocks moved up late last week and bonds finally got caught up this week.  After all, both are right in line with the same levels from Wednesday morning.
But it’s also clearly not as intact as it had been last week.  This could be viewed as a transitional phase with the market gradually getting back to trading Fed accommodation (i.e. lower inflation = good for both stocks and bonds because it implies a friendlier Fed, or higher inflation doing the opposite).  Either way, it’s encouraging to see bonds holding ground without rushing back up to the levels seen before the SVB failure.  This strongly suggests the market is assuming some economic fallout from the banking drama.  
In other words, the conditions that justified 4% 10yr yields have changed, probably.  And that belief would only be eroded by a series of compellingly strong economic reports.

January was a refreshingly strong month for many economic reports, but especially for metrics relating to the housing and mortgage markets.  This wasn’t too hard to reconcile with December and January having much lower mortgage rates, on average than October and November.   There’s also a point at which housing market has sustained enough damage that buyers start seeing more value.  This sentiment has also been in play depending on the market in question.  In other words, prices and sales had lost enough ground that prospective buyers were seeing more value.  Lower rates only compound the effect. The concern was that February’s sharply higher rates might push back in the other direction.  There was already some evidence for this based on the noticeable decline in purchase applications reported in the MBA’s weekly numbers. Today’s release of February’s Pending Home Sales figures from the National Association of Realtors adds to the case for resilience in the housing market.  Despite the rising rates in February and a forecast calling for a drop of more than 2%, Pending Sales managed to  increase by 0.8%.   No one would confuse the outright level of sales with being strong.  In fact, the index continues to operate near record lows.  But the point is that we’re seeing resilience in yet another report despite expectations for a poorer showing.  Long journeys and single steps, etc…

Two hydrogen atoms meet. One says, “I’ve lost my electron.” The other asks, “Are you sure?” The first replies, “Yes, I’m positive.” (Yes, its cutting-edge humor like this that keeps you coming back.) Do positive thoughts matter? Houston’s Norina and Ramon Navarro think so. Thinking positive thoughts about the housing inventory in the United States probably won’t help, and I am hearing renewed stories about a lack of inventory and multiple offers at certain price points around the nation. There are only 578,000 active listings nationwide. (This is out of 142 million housing units.) Where’s the supply? Well, what do American Homes 4 Rent, Home Partners of America/Blackstone, Tricon Residential, Main Street Renewal, Progress Residential, Invitation Homes, and a smattering of others have in common? They have accumulated more than 65,000 homes in the Atlanta area alone. Thank you to DepthPR’s Kerri M. for sending along this article spelling things out titled, “The American Dream for Rent.” Given that so much of our lives are dictated by supply and demand, well, you get the picture, and many think it isn’t pretty. (Today’s podcast can be found here and this week it’s sponsored by MGIC. Since 1957, MGIC has insured more than 13.5 million mortgage loans with innovative products, tools and strategies that help customers solve problems and fuel growth. Explore tools and solutions to boost your business here. Interview with SPMB’s Ross McLaughlin on executive search firms and finding the best candidates for open positions.)