Mortgage rates moved higher today at the fastest pace in 2 weeks. Part of the reason the size of the jump was the fact that rates have done quite well since hitting the last major high early last week. In other words, there was a bit of a rebound effect. The average lender made it down to the 5.25%-5.375% neighborhood as of last week when it comes to top tier conventional 30yr fixed rates. As of this afternoon, they're back in the 5.375%-5.5% zone--possibly higher due to late day weakness in the bond market. Bonds (which dictate rates) took extra damage today from a stronger than expected Retail Sales report. The headline sales growth of 0.9% was actually in line with expectations, but the previous month was revised significantly higher and some other components of the data suggested consumers were far less worried about inflation than some sentiment surveys would suggest.
Another Head Fake Comes and Goes With Help From Data and Powell
As of yesterday, bond yields looked like that at least had a chance to remain under the 2.92% pivot point after breaking below it for the first time in 2 weeks last Thursday. With a bit of weakness this morning, yields began the day right at 2.92. After the stronger Retail Sales data, it was game over. Selling pressure continued throughout the day and it found no solace in afternoon comments from Fed Chair Powell. With MBS losing roughly 5/8ths of a point and 10yr yields up almost 10bps to 2.98%, it's safe to say another head fake (toward lower rates) is in the books.
Econ Data / Events
Fed MBS Buying 10am, 11:30am, 1pm
April Retail Sales 0.9 vs 0.9 f'cast -March revised up to 1.1 from 0.7
Industrial Production 1.1 vs 0.5 f'cast, 0.9 prev
NAHB Builder Confidence 69 vs 75 f'cast, 77 prev
Market Movement Recap
09:11 AM Weaker right from the start of the overnight session as China rebounded. Flat in Europe. More weakness after Retail Sales. 10yr up 7.5bps at 2.96 and 4.0 UMBS down 3/8ths of a point.
11:34 AM Weakness continued into 10am, then bounced as stocks began to sell-off. That bounce bounced at 11:45 and we're back near weaker levels with 10s back up to 2.96 (from 2.93) and MBS back to -3/8ths on the day.
02:26 PM Volatility after Powell comments, but no major change in levels or the intraday trend. MBS had already weakened another eighth of a point and are currently down half a point on the day.
03:52 PM New lows for the day with MBS down 5/8ths. Selling continues to be linear, but with bigger jumps between highs and lows over the past few hours. 10yr yields continue selling calmly, now up 9bps at 2.978%.
Homebuilder confidence may still be higher than almost any time before the pandemic, but it's now lower than any time since. The post-pandemic lows arrived abruptly with today's release of the Housing Market Index from Wells Fargo and the National Association of Homebuilders (NAHB). The month-over-month decline was the largest in 2 years and is one of only 3 other times that the index has fallen by 8 points since records began in 1985. Pain points for the housing market are no mystery with prices continuing to increase by roughly 20% year-over-year and mortgage rates hitting the highest levels since 2009 in recent weeks. The net effect is a massive hit to affordability that increasingly sidelines would-be buyers. NAHB notes less than half of new and existing homes are affordable for the average family. Things are even worse for first time and entry-level buyers. The builder confidence index has several components, and they can take turns influencing the headline number. These include current sales, expectations for sales over the next 6 months, and buyer traffic. All three dropped significantly, with a 10 point decline in the 6 month outlook edging out the 9 point drop in buyer traffic and the 8 point drop in current sales.
Bonds have had a good run recently--perhaps their best when it comes to arguing for a ceiling to cap the brutal rate spike of 2022. The week began with enough strength to keep hope alive that the friendly correction could continue, but not quite enough strength to avoid worrying that we were simply seeing a set-up for a broader sideways range. The latter would make good logical sense considering inflation would need to drop significantly before bonds rallied in a sustainable way and that inflation data can only come in so fast.
Now today, a recovery in overseas equities markets and a strong Retail Sales report are making it easy for bond traders to reinforce the floor of the broader range. In fact, the floor is currently looking more like a trend of higher lows for bond yields.
Keeping things in perspective, last Thursday the White House announced a raft of measures to alleviate the ongoing baby formula shortage, which has worsened in recent weeks because of a major product recall and supply chain problems. Here in Manhattan at the MBA’s Secondary conference, participants learned that the CFPB certainly won’t be “resting on its laurels” any time soon. Not only will it not be discouraging states from creating their own CFPB-like bureaus, but we can expect the CFPB to continue to broaden its range of enforcement activities. (And servicers took note of the CFPB’s servicing bulletin yesterday.) Fortunately, most lenders and vendors are doing a very good job with compliance! Partnering with the Agencies is on the agenda, as is the ARM market, climate change (and its impact on mortgage pricing and reps & warrants), cybercrimes, and hedging. A full slate! (Today’s podcast is available here and this week’s is sponsored by Candor. With Candor’s Machine as an Underwriter, lenders modernize their manufacturing infrastructure making them immune to margin, capacity, and staffing challenges forever. Candor’s AI solution can be deployed in 30 days, delivering fast and flawless loan production.) Lender and Broker Software, Services, and Programs Northpointe Bank Correspondent Lending announces recent enhancements to its Expanded Portfolio (Non-QM) programs. Guideline expansions include loan-to-value ratios up to 85% for investment properties, and unlimited cash out for loans with LTVs up to 60% and loan amounts up to $1,500,000. Also, business LLCs are now allowed for investment properties with all programs. Reach more borrowers with solutions from Northpointe’s Expanded Portfolio programs. Prime Non-Agency focuses on higher credit borrowers looking to take advantage of Non-QM features such as interest-only options, 40-year terms, alternative doc options like bank statements and asset depletion, or financing for non-warrantable condos, including condotels. Expanded Access and New Start help borrowers with seasoned or recent credit events, and Investor Cash Flow offers financing for investment properties utilizing the debt-service coverage ratio. With programs available in all 50 states, Northpointe Bank provides tailored solutions to maximize your profitability and help your business grow. View program details for more information or email us at firstname.lastname@example.org.
Mortgage rates are coming off of one of their best weeks in nearly 2 years, which isn't quite as glamorous as it sounds, but still a good accomplishment (read more about it in last week's recap HERE ). Rates managed to maintain those levels as the new week began. Some lenders were microscopically better, but not enough to have a noticeable impact on most quotes. The bond market (which dictates rates) is finally shifting into a more indecisive phase after multiple decisive defeats throughout 2022. Those defeats pushed rates higher at the fastest pace since the early 80s primarily due to inflation and the Federal Reserve's increasingly austere efforts to control it. The Fed is only just beginning to embark on their policy tightening campaign (relative to their intended destination), but rates themselves may already be most of the way to the finish line. The ultimate location of that finish line will depend on how inflation evolves from here and the global economic fallout from tighter policy (not to mention the higher costs). In the past 2 weeks, investors have been more vocal in considering that economic fallout. At the same time, there have been some signs that inflation is beginning to decelerate--both good things for rates . But don't expect rates to tumble precipitously. The best way to think about what's happening right now is that a more balanced, uncertain outlook is taking the place of a frenzied dash to push rates higher as quickly as possible without stopping to consider any counterpoints. That means the base case is for sideways volatility, at best. Thankfully, that's a big upgrade relative the what we've seen so far in 2022.
Bonds Hold Decent Gains to Start New Week
After mixed trading overnight, bonds began the day in the US at relatively unchanged levels before rallying throughout the morning hours. There has been a good amount of correlation between stocks and bond yields over the past week. Oil prices joined that bandwagon on Thursday and the correlation continued right up to the 8:20am CME open. At that point, new trades for the new week along with global growth concerns helped bonds hold their ground despite more of a flat performance in stocks (and a rally in oil). The day lacked any big, obvious market motivations. Traders didn't take any risks pushing technical boundaries, and despite the rally, instead gave the impression that they were settling into a broader sideways range to wait out the standoff between inflation, central bank policies, and global growth concerns.
Econ Data / Events
Fed MBS Buying 10am, 11:30am, 1pm
Empire State Manufacturing -11.6 vs 17.0 f'cast, 24.6 prev
Market Movement Recap
08:48 AM Initially stronger overnight on Asian market weakness (China growth fears). Hawkish ECB = selling pressure in European hours, but still slightly stronger vs Friday. 10yr down 2bps and MBS up one tick (0.03).
10:20 AM Additional gains after the 9:30AM NYSE Open. Some stock momentum spilling over to bonds, but EU bonds helping US bonds avoid following stocks as they bounce back up to opening levels. 10yr down 5.4 bps at 2.873% and UMBS 4.0 up 6 ticks (.19) at 99-18 (99.56)
01:25 PM Gains leveled off after 11am and bonds have been sideways to slightly weaker since then (but still in positive territory on the day). 10yr yields are down 5bps at 2.879 and 4.0 UMBS are up 5 ticks (.16).
03:14 PM Yields and stocks topped out at 2:30pm. Both have been moving in the other direction since then. 10s are back down to 2.88 after trading over 2.89 briefly. 4.0 UMBS are up a quarter point now at the highs of the day.
Bonds shook off a bit of weakness in Europe to start the new week in slightly stronger territory. Gains have continued into domestic hours, which brings yields closer to Thursday's lows. Breaking below those would mean we're at the best levels in 3 weeks.
Ever since breaking above 2.40% (10yr) in March, we've been watching and waiting for signs of a rate ceiling. Those efforts have been been with a series of disappointments and additional runs toward higher rates. That said, each attempt to solidify a ceiling has been incrementally more compelling, even if only just. This morning's strength means this attempt fits the same pattern.
What signs are we looking for in order to confirm a shift? First off, we have to keep in mind that even if bonds meet our criteria for a shift, changes in the data shift things right back toward higher rates. Inflation continues to be the biggest issue and it has to continue to ebb in order for rates to hold a ceiling.
Beyond that, we can use some technical milestones to benchmark the progress. One of the broader indicators we've been tracking is the trends in stochastics seen in the chart below. In a nutshell, the conditions that need to be met are as follows:
1. Stochastics need to gap up from overbought levels and trend toward oversold territory without a major correction.
2. After hitting oversold territory, the reversal needs to break the yellow trend line and continue back to the lower (overbought) line.
Historically, both the breaking of the trendline (gray vertical line) and the return to overbought levels (teal vertical line) have been good signs in the bigger picture.
The only big issue with this analysis is that there are limited pertinent examples. Here are a few others followed by some thoughts on each.
The most noticeable difference in the 2016 example is that it didn't portend a big, immediate correction. It basically did the bare minimum to count as "confirming a ceiling."
The 2012 example is less than ideal because market conditions were so different compared to 2016 or the present. The stochastic trend emerged in an excruciatingly flat market which, in my mind, means I probably wouldn't pay any attention to this one. Still, it is the next most recent example that fits the formula. It definitely confirmed a ceiling, and both milestones (gray and teal lines marking the technical breakout and the overbought level) resulted in additional gains for bonds.
We're basically just now getting to our "gray line" levels today, so we have a ways to go before confirming the pattern as seen in the teal lines in the charts above. If we want to think about all this in more basic terms, plain old pivot points are still useful. On that note, 2.83 and 2.72 are the only obvious games in town.
Plenty of capital markets folks, senior management, and the usual cadre of vendors are here in Manhattan, doing the macarena until 2AM. Okay, just kidding. They’re actually talking about some pretty serious stuff. For example, MCT writes, “We are seeing, from our clients, that current market roll costs and the ultimate effects on execution are the biggest concerns for secondary marketing heads,” and is spelled out in this MCT article. Trying to wring every basis point out of a loan or servicing sale is another topic. Small steps by Freddie Mac and Fannie Mae are having some positive impacts while they continue to manage credit risk and use pricing as a tool to guide business. Agency shifts will continue, and some of the talk includes policies about including rental payments in the credit decision, helping the “green” channel with policies regarding solar panels, affordable housing programs, protecting borrower information, and the impact of climate change on pricing and policies. Stay tuned! (Today’s podcast is available here and this week’s is sponsored by Candor. With Candor’s Machine as an Underwriter, lenders modernize their manufacturing infrastructure making them immune to margin, capacity, and staffing challenges forever. Today’s has an interview with Rida A. Sharaf, Chief Strategy Officer, US Real Estate Services (USRES) and Res.net Systems on REO inventory, the end of moratoriums, and the restart of evictions and foreclosures.) Lender and Broker Software and Services
Mortgage rates have moved higher at the fastest pace in decades so far in 2022, but this week proved to be a refreshing exception. To understand why, we first need to examine the relationship between stocks and bonds, which is a bit more variable than most people assume. Conventional wisdom holds that stock prices and bond yields correlate with each other. This makes good logical sense from the standpoint of selling one to buy the other. For instance, if you sold bonds to buy stocks, bond yields and stock prices would both move higher together. While we often see this correlation over short time frames, the longer term trends tend to be quite different. To make matters more confusing, despite the INVERSE relationship over the longer run, there are definitely pockets of time where investors are moving money out of stocks, into bonds, and vice versa. This week hasn't been flawless in that regard, but it has generally seen more of that conventional wisdom type of movement. As the highlighted portions of the chart point out, we can see examples of conventional wisdom and the opposite sort of movement in close proximity to one another. In other words, sometimes the orange and blue lines quickly moved in opposite directions despite mostly following each other. Generally speaking, one of the most common reasons to see stocks and bonds jump in opposite directions is Fed policy. Even though the Fed conducts monetary policy in the bond market, when the Fed's policies are looser, the entire market tends to benefit. Conversely, when the Fed shifts toward a tighter policy stance--as has been the case on multiple occasions over the past 6 months, both stocks and bonds tend to suffer.