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.
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%
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...
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.
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.)
Applications for both home purchases and refinancing rose for the fourth time during the week ended March 24. The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of application volume, increased 2.9 percent on a seasonally adjusted basis and 3.0 percent unadjusted compared to the week ended March 17. The Refinance Index was 5 percent higher than the previous week and the refinance share of activity increased to 29.1 percent of total applications from 28.6 percent. The Index was 61 percent lower than the same week in 2022. [refiappschart] Purchase applications were 2.0 percent higher than the prior week on both an adjusted and an unadjusted basis but the unadjusted Purchase Index was 35 percent lower than the same week a year earlier. [purchaseappschart] “Application activity increased as mortgage rates declined for the third straight week. The 30-year fixed rate declined to 6.45 percent, the lowest level in over a month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “While the 30-year fixed rate remained 1.65 percentage points higher than a year ago, homebuyers responded, leading to a fourth straight increase in purchase applications. Home price growth has slowed markedly in many parts of the country, which has helped to improve buyers’ purchasing power. Purchase applications remain over 30 percent behind last year’s pace , but recent increases, along with data from other sources showing an uptick in home sales, is a welcome development.”
The week began with a noticeable uptick in mortgage rates relative to last week's lows. Today's momentum continued in the same direction, but with less urgency. The average lender moved up by 0.06% for a flawless conforming 30yr fixed scenario. Mortgage rates are driven by the constantly-changing prices of mortgage-backed securities (MBS), which are essentially bonds that rely on mortgages as collateral. The bond market had been doing very well in the midst of the recent banking panic as investors sought safe havens to park cash. MBS and Treasuries both fit that bill. But as panic subsides, investors have moved cash out of the bond market. This puts downward pressure on bond prices and upward pressure on yields/rates. This continues to be the primary source of input for rates, and one that is beginning to settle down. There is more room for rates to adjust higher if banking concerns continue to subside.
The Most Boring Trading Day in Weeks
Bond market volatility exploded on March 10th after the failure of Silicon Valley Bank. There hasn't really been a day since then that would qualify as "boring," but if we had to pick one, today stood out. It had the narrowest trading range of any day in weeks. After losing a bit of ground early, momentum was decidedly 'sideways.' There was no strong correlation with the stock market (a hallmark of recent trading patterns). And there were no big ticket reports or events that did anything to change the narrative. All in all, it was a placeholder in the quest for more relevant inputs.
Econ Data / Events
Case Shiller Home Prices y/y
2.5 vs 2.5 f'cast, 4.6 prev
FHFA Home Prices y/y
5.3 vs 6.7 prev
FHFA Home Prices m/m
+0.2 vs -0.1 f'cast
104.2 vs 101.0 f'cast, 103.4 prev
Market Movement Recap
09:06 AM Bonds rallied back to unchanged levels after weakness in Europe. Slipping slightly now. 10yr up 1.3bps at 3.553. MBS down 1 tick (.03).
10:23 AM Losing a bit of ground after a stronger Consumer Confidence report. 10yr up 3.3bpsa at 3.573. MBS down just over an eighth of a point.
12:27 PM MBS drifting down to lowest levels of the morning. See the alert for more.
01:09 PM Additional weakness heading into the auction, but recovering a bit afterward. MBS down only an eighth. 10yr up 1.7bps at 3.556, down from highs of 3.577.
04:25 PM Weakest levels in Treasuries with 10yr yields up 3.4bps at 3.573. MBS down 6 ticks (.16)
Some people might like the idea of perpetual appreciation in the housing market, but others know that the industry was badly in need of a cool-down after values surged at an unprecedented pace post-pandemic. While the interest rate spike of 2022 wasn't entirely unprecedented, it was the fastest in decades and it left no doubt as to when home prices should embark on the much-needed correction. Two of the most official methods to track home price progress are the FHFA and Case Shiller Home Price Indices (HPIs), released concurrently once per month. January's update just came out this morning and the results are mixed. In annual terms, price appreciation continues to decline rapidly: Based on price trends over the past 12 months, it would be almost impossible for the annual pace to avoid dipping into negative territory in the coming months. That will be more a reflection of how high prices were a year ago than an absence of resilience in the present. In fact, the most recent trends in prices are more resilient than expected--especially when viewing the broader FHFA data set. FHFA's monthly HPI moved back into positive territory in January. Case Shiller was down 0.4%, but that's an improvement from December's drop of 0.5%. Both are well off their sharpest months of depreciation late last year. So yes... home prices are declining from last year and depending on the metro area, prices are still declining month-over-month to a small extent. But the declines were expected. The surprise is how shallow they've been and how quickly the resilience seems to be stepping in.
The week began with a somewhat sharp sell-off. This followed the steady selling pressure in bonds seen last Friday (albeit after the lowest opening yields in more than 5 months). With bank failures being the key reason for those low yields and a distinct absence of new bank failure in recent days, is it time to consider the end of this bull run in bonds?
If one were to base their answer entirely on yesterday's trading, then "maybe." But let's consider the broader context. We've had several 24-48hr periods where rates have spiked in similar fashion only to be dragged back down to the new, lower yield range. Notably, the "new" range is actually also the same old range that we were watching in late January--the one that was ultimately broken by the strong jobs report in early February.
Treasury yields continue to operate in this range, despite a bit more volatility around the highs and lows. Additionally, the recent peaks in yields (and Fed Funds Futures, for that matter) actually form a trend line leading back down into that range. While this trend line doesn't predict the future, it does give us a good line in the sand to determine when it's time to truly consider the end of bank drama narrative.
Even after that shorter term line is broken, bigger picture questions will remain. If incoming economic data is softer, bonds could merely bounce at the longer-term trend line seen in the chart below, and set up for a more serious rematch with the 3.3-3.4% levels.
Today's calendar is more active than yesterday's, but there's still no big ticket econ data to digest. The 1pm 5yr Treasury auction may be the highlight in terms of scheduled events. On the non-scheduled front, there's already an active slate of corporate bond issuance to digest (something that helps mitigate the level of concern over this morning's modest weakest).