The Daily Tearsheet

Stocks are lower as global yields move higher. Bonds and MBS are down again.

We will have a 10 year auction at 1:00 pm today and the FOMC minutes at 2:00. So we could see some volatility around rates during that time, especially if investors turn their nose up at the auction. The minutes will prove interesting, however the Fed Funds futures are decidedly predicting no change in policy at the October meeting.

NY Fed President John Williams said there is “no need for urgency” in continuing to hike rates. The move in the 10 year over the past month fulfils much of the same role as an increase in the Fed Funds rate. San Francisco Fed President Mary Daly also indicated that an October rate hike might be unnecessary.

The global sovereign debt sell-off continues, with UK Gilt yields up 11 basis points today. French and Italian sovereign yields are up big, with the French OAT up 15 basis points and the Italian BTP up 14. Since global sovereign yields tend to correlate, this is pushing down govvies across the board.

European yields are diverging, indicating investors are getting skittish again about some of the Southern European sovereigns. The spread between the French OAT and the German Bund (the German Bund is still the benchmark for Europe) is now 138 basis points, compared to about 70 at the beginning of the year. The impact on US bonds should be minimal, unless it simply means investors are souring as sovereign debt as an asset class. It is tough to call the sell-off a global risk-on trade given that the breadth in the S&P 500 is pretty lousy. A few big names that dominate the index are driving it higher, while vast swaths of US stocks languish.

It isn’t clear where the money exiting sovereigns is going. It isn’t going into MBS because spreads are widening. There are reports that investors are shortening duration (in other words selling the 10 year and buying 3 month T bills to roll over as the Fed hikes rates.

Mortgage applications fell 4.2% last week as purchases decreased 2% and refis fell 8%. Mortgage rates hit their highest levels in 3 years. “Mortgage rates moved to their highest level in almost three years last week, with the 30-year fixed rate reaching 7.49% as both Treasury rates increased and spreads widened with the increase in rate volatility,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Very few homeowners have an incentive to refinance at these rates, and the jump in borrowing costs has caused many potential borrowers to step back from the purchase market. With rates roughly a percentage point higher than a year ago, refinance applications last week were at the lowest level since 2025 and fell to less than half of last year’s pace.”

By my calculations, the P&I payment on the median home at the prevailing mortgage rate has increased by 20% YTD. So while home prices are falling in real terms (i.e. rising slower than inflation) affordability isn’t being improved because of rate movement.

On the refi side, yes rates are a headwind, but as mortgage rates increase so do credit card rates and other revolving debt. A cash-out debt consolidation refi can still make a lot of sense for a borrower struggling with credit card debt.

Homeowners in the Northeast who generally use heating oil can expect to see big bills this winter. Prices are expected to be $5.26 a gallon, up 34% from a year ago. Luckily we have a strong El Nino, which generally leads to milder winters in the Northeast. That said, heating oil bills for the winter are expected to run about $2,115, up 21% from a year ago.

Blame refining capacity shortages. Global supply disruptions are blowing out crack spreads which influence the price of distillates independent of the level of crude oil.

I will be at the MBA Conference in Chicago if anyone wants to meet. Should be an interesting conference given the move in rates.

Stocks are higher this morning as oil prices ease. Bonds and MBS are up small.

More and more oil is getting out of the Middle East which is helping push prices lower. The blockade on Iranian oil is working and insurance rates are falling. Current transit rates are around 13.5 million barrels per day through the Strait, which is around 80% of pre-war levels. It had fallen to around 6 million barrels per day during March and April. The Saudis have diverted some of their production to pipelines which reach the Red Sea, which is also helping.

Diesel fuel is still elevated, however that is a refining issue more than a crude oil issue. This is particularly an issue in the West Coast where refineries are cutting / shutting down due to onerous environmental restrictions. West Coast refining capacity has fallen some 30% over the past 5 years. Diesel costs flow into all sorts of prices.

Ever since the beginning of the energy prices have seen a double whammy, from rising crude prices and rising crack spreads. The increase in crack spreads (i.e. refining margins) have blown out this year:

Like mortgage rates are a function of the Treasury rate and the MBS spread, gasoline and diesel prices are a function of the oil price and the crack spread. So the issue is a function of refining capacity and oil prices. Since diesel and heating oil are the same thing, East Coast refineries are diverting production to heating oil stocks, which means less diesel. So falling oil prices are encouraging, however they aren’t the whole story and investors hoping for a bond rally on falling crude prices might be disappointed.

The services economy expanded in September, albeit at a slower pace according to the ISM Services Report. Business activity decelerated as did new orders. Employment picked up and prices continue to increase. Exports fell pretty dramatically.

The Prices Index was above 70 for the sixth time in 7 months and hit the highest level since 2022. Energy is the main driver here, especially diesel.

“Tariffs and fuel cost impacts were the most cited issues impacting respondents’ supply chains; in fact, fuel costs were mentioned twice as often as any other single issue impacting performance. Supply chain constraints were also a top concern of respondents and were impacting both lead times and costs. The Employment Index’s first reading above 50 percent in three months seems to have resulted from increasing backlogs, as well as high levels of business activity and new orders. Although business activity and new orders growth rates have eased a bit, the Backlog of Orders index hit its highest level since July 2022 (58.3 percent).”

National rent growth declined in September, according to Apartment.com. The national average rent declined 0.08% from August to $1,752. The West and the South are struggling, while the Midwest and Northeast are a bit more balanced. There was a lot of apartment construction over the past 5 years, and most of it was in the Sunbelt and the Southeast.

A lot of apartment rehab projects were started during the COVID years and these newly refurbished units are competing with new buildings that are offering heavy incentives to lure tenants. These projects were financed with 5 year bridge loans which are coming due. It is going to be hard to refinance these projects given current rates and rent levels. We could start to see some pressure in the resi CLO space.

Berkshire Hathaway picked up more stock in Lennar. It now owns 12% of the company. Berkshire is big in the homebuilding space, owning Taylor Morrison and Clayton. It also has stakes in Lennar, NVR and D.R. Horton. Like mortgage banking, homebuilding is highly cyclical and we are at the nadir of the cycle.

Stocks are flattish this morning on no real news. Bonds and MBS are up small. It is a slow news day.

The upcoming week will be relatively data-light, with only ISM data and consumer sentiment. We will get the FOMC minutes on Wednesday and Fed speakers on Tuesday and Thursday.

Bonds rallied on Friday after the weaker-than-expected jobs report, but the lower rates didn’t last long. It is hard to see a catalyst for the resumed sell-off. Austan Goolsbee made some comments later on Friday, but they seemed relatively benign.

We are in a bear market for sovereign debt at the moment, and one of the main characteristics of a bear market is that the path of least resistance is down. In other words, it doesn’t take a catalyst to sell – it takes a catalyst to buy. Bond market cycles are very, very long. The current one which ended in 2021 began in 1981, when your local bank would pay 17.6% on a six month CD and the 10 year yield was in the high teens.

Chicago Fed President Austan Goolsbee said that both a hike and a pause are “on the table” for the October meeting. “There is plenty ⁠of room ⁠for anything to ​be on the table,” ​Goolsbee told Fox Business’ ‌Edward Lawrence, who asked if he felt the Fed ⁠ought to raise rates or pause this month as ⁠markets ‌now expect. “Let’s see ⁠if we ​can ‌get some evidence ​put together ⁠that suggests we’re headed back to 2% inflation.”

As we look at the Fed Funds futures, the markets are handicapping a 20% chance of a rate hike at the October meeting. The Atlanta Fed GDPNow model didn’t change on the employment report – it still sees robust 3.7% growth for Q3.

Stocks are higher this morning (and oil lower) on a potential plan for the EU to release a 50 million barrels of diesel fuel from storage stocks. The IEA is also considering a release of 50 million barrels of crude. Bonds and MBS are up.

Yesterday’s rally in the 10 year (falling yields) indicates there might have been some end-of-quarter noise going on towards the end of September which pushed yields up above 5.3%.

The economy added 29,000 jobs in September, according to the Employment Situation Report. The unemployment rate ticked up to 4.2% from 4.1%. The payroll number was below expectations, and the unemployment rate was above.

That said, the internals of the report are encouraging. The labor force increased by 485,000 as 346,000 people who were previously out of the labor force re-joined. The number of people employed rose by 406,000, while the number of unemployed rose by 78,000.

This drove the labor force participation rate up by 0.1% to 59.2% and the employment-population ratio to 61.8%. Average hourly earnings rose 3% on a YOY basis.

Health care / social assistance was the leader in payroll additions, followed by manufacturing. Jobs were lost in IT and government.

Stocks and bonds are rallying in the immediate aftermath of the report with the October Fed Funds futures now handicapping only a 14% chance for a rate hike this month.

Fed Vice Chairman Philip Jefferson spoke yesterday and implied that an October rate hike isn’t a slam-dunk:

As we look ahead, my view is that any future adjustments in policy should be determined by carefully examining trends in the data, the evolving outlook, and the balance of risks. Since our September meeting, yields across the term structure have increased further, a sign that investors are reassessing the evolving macroeconomic landscape. My colleagues and I will need to come to our own judgment, which may take more time. I will continue to assess whether underlying trends suggest that inflation will return to target with sufficient speed. With more data in hand, such trends may lend themselves to better discernment, as may the appropriate stance of monetary policy.

Since the September FOMC meeting, the 10 year yield had picked up 30 basis points in yield, and it had been steadily rising in the lead-up to the meeting. Rising long-term rates also have a tightening effect and the Fed doesn’t want to kill the labor market just to move inflation from 3.4% to 2%.

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The MBA Annual conference in Chicago is rapidly approaching. Are you looking to hedge a pipeline of non-QM loans or your servicing portfolio? CME Group lists SOFR futures including Eris SOFR Swap futures and are an excellent way to manage this risk. Plus, with the rollout of Eris Options this past summer, you have even more tools to tailor your strategy. Talk to John Douglas at john.douglas@erisfutures.com to book a meeting.

In addition, Eris Innovations will also have a cocktail hour on Monday afternoon. Space is limited. Please reach out to john.douglas@erisfutures be placed on the guest list.

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The manufacturing economy expanded in September, albeit at a slightly slower pace than August. “In September, U.S. manufacturing activity remained in expansion territory. Of the five subindexes that make up the PMI^®, only New Orders and Employment grew faster than the previous month. In September, 40 percent of the comments were positive and 60 percent negative, with a 1-to-1.6 ratio of positive to negative sentiment. Among negative comments, pricing volatility was mentioned in 46 percent, tariffs 34 percent, the Iran war 30 percent and increasing lead times 21 percent; most comments mentioned multiple factors.

Prices increased by 6.8 points, which to the fastest level since the beginning of the Iran War.

Stocks are higher as we enter the final quarter of the year. Bonds and MBS are down small.

The 10 year got smashed again yesterday despite the less bad than feared PCE inflation report. Over the third quarter, the 10 year bond yield increased by 81 basis points. Most of the decline happened last month.

There was no particular catalyst that drove the big decline. Oil did rise, but the move seems outsized given the change. It is a global phenomenon where all sovereign debt benchmarks are getting hit simultaneously. The more interesting question is what are these sellers doing with the proceeds of these sales.

Interestingly, the October Fed Funds futures moved pretty dramatically the other way, with no move now the most likely outcome. They now see a 37% chance of a rate hike and a 63% chance of no change in policy. The December futures have a 58% chance of one more rate hike this year as the base case.

CNBC wins clickbait title of the year “Mortgage rates could reach 9%, says Cotality’s Selma Hepp” If you watch the interview, you see it is more of a worst-case scenario, where the 10 year Treasury goes into the 6%-7% range and people lose confidence in the US dollar as a safe haven asset. Cotality’s base case is that mortgage rates stay in the 7% range.

The most likely scenario for a spike in Treasury rates would probably not be inflation or oil. The worst case scenarios there have come and gone. It would be a debt-ceiling standoff. The debt limit will probably have to be raised in mid 2027, and if the Democrats take Congress there is a definite possibility that we will see some brinkmanship negotiations. The other thing to keep in mind here is that monetary policy acts with a 6-9 month lag, so the effects of the Fed tightening cycle will start to be felt next spring and summer. So that works against higher rates as well.

The US dollar is in zero danger of losing its safe haven status simply because there is no alternative. The debt issues in the US are high, but the competitors (Japan and the EU) have the same issue or worse. Japan’s debt to GDP ratio is 2.5x (compared to the US at 1.3x). The EU and the UK have better debt-to-GDP ratios than the US, but the liquidity of the US Treasury market is better. To be a reserve currency you need liquidity and stability. China will never permit its currency to fluctuate and will impose capital controls if necessary so that currency is out. The US more or less wins by default.

Regardless, 9% mortgage rates don’t seem to be in the cards any time soon. The most likely case is that rates stay here and don’t move much. I think a recession which takes rates back into the 6% level is more likely than her 9% scenario, FWIW.

__________________________

The MBA Annual conference in Chicago is rapidly approaching. Are you looking to hedge a pipeline of non-QM loans or your servicing portfolio? CME Group lists SOFR futures including Eris SOFR Swap futures and are an excellent way to manage this risk. Plus, with the rollout of Eris Options this past summer, you have even more tools to tailor your strategy. Talk to John Douglas at john.douglas@erisfutures.com to book a meeting.

In addition, Eris Innovations will also have a cocktail hour on Monday afternoon. Space is limited. Please reach out to john.douglas@erisfutures be placed on the guest list.

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More evidence the employment market is getting better: Job cuts fell 18% MOM and 20% YOY to 43,281 according to outplacement firm Challenger, Gray and Christmas. This is the lowest monthly total since 2022. Hiring plans picked up as well.

“Companies are in a wait-and-see period right now. Employers are facing high energy costs, an uncertain war in Iran, a rate hike that could make hiring more expensive, plus the liklihood of surging healthcare costs. We’ve seen layoff activity subside over this year, and September continues to illustrate this point,” said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.

“Hiring plans are up over the year, but we’re not seeing the surge of hiring plans that come with the holiday season, which suggests a very cautious approach,” he added.

Companies are reluctant to add seasonal holiday help quite yet. I guess the fear is that higher gasoline prices are going to depress disposable income which means less spending at the stores. The early indications for back-to-school spending were good, though September retail sales will be a better tell than August’s.

Yesterday’s personal incomes and outlays report caused the Atlanta Fed’s GDP Now model to forecast 3.7% growth for Q3 compared to the 5.1% it was previously showing. That 5.1% number always seemed suspect and was way out of step with the forecasts of everyone else.

Stocks are flattish this morning after a strong ADP report and an inflation reading that wasn’t as bad as feared. Bonds and MBS are still down regardless as the sentiment in the bond market remains putrid. Note that today is the end of the quarter so we might see some weirdness towards the close on window dressing.

Personal incomes rose 0.2% MOM while personal consumption expenditures (i.e. spending) rose 0.9%. The all-important PCE Price Index (the Fed’s preferred inflation measure) rose 0.3% MOM and 3.4% YOY. The core rate, which excludes food and energy, increased 0.2% MOM and 3.0% YOY. This numbers were below Street expectations, but still well above the Fed’s target rate. Still, it looks like inflation is at least flat, and the rate hikes haven’t even begun to take effect yet.

The private sector added 90,000 jobs in September according to the ADP Employment Report. “It’s a strong report. After a three-month slowdown, job creation rebounded and pay growth remained solid.” Education / Health Services accounted for 55k, followed by leisure / hospitality at 22k. Financial activities declined as did professional / business services. The 90k increase is higher than the Street estimate for 75k private payrolls in Friday’s report.

Job openings fell by 258k last month to come in just above 7 million. We saw big declines in professional / business services and healthcare / social assistance. Trade / Transportation / Utilities saw an increase.

Home prices rose 1.9% YOY in July according to the Case-Shiller Home Price Index. Again we saw a wide divergence between MSAs with Chicago leading the pack (up 6.9% YOY) and Seattle (down 1.6%) bringing up the rear. New York and Cleveland also were top gainers.

“While home prices continued to decline in real terms in July 2026, marking the 14th consecutive month of real declines, slightly lower inflation and stronger nominal home price appreciation helped narrow the gap,” said Rebecca Kaufman, Associate Director of Commodities at S&P Dow Jones Indices. “In July 2026, the S&P CoreLogic Case-Shiller National Home Price Index posted a 1.9% annual gain, up from 1.6% in June. During the same period, consumer prices posted a 3.4% annual gain, down slightly from 3.5% in June.

“Although inflation remained elevated at 3.4%, much of the increase was concentrated in energy, with energy and gasoline prices rising 14.7% and 24.6%, respectively,” Kaufman concluded. “By contrast, core inflation, which excludes food and energy, rose only 2.5% year over year. This distinction is important because persistent inflation in shelter and other core categories tends to have a more direct impact on housing affordability than energy-driven price fluctuations.”

It is interesting that home price appreciation is lagging inflation but shelter inflation remains a big driver of overall inflation.

__________________________

The MBA Annual conference in Chicago is rapidly approaching. Are you looking to hedge a pipeline of non-QM loans or your servicing portfolio? CME Group lists SOFR futures including Eris SOFR Swap futures and are an excellent way to manage this risk. Plus, with the rollout of Eris Options this past summer, you have even more tools to tailor your strategy. Talk to John Douglas at john.douglas@erisfutures.com to book a meeting.

In addition, Eris Innovations will also have a cocktail hour on Monday afternoon. Space is limited. Please reach out to john.douglas@erisfutures be placed on the guest list.

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Consumer confidence declined in September according to the Conference Board Consumer Confidence Index. “The Consumer Confidence Index deteriorated notably in September, following two prior months of softening,” said Dana M Peterson, Chief Economist, The Conference Board. “The Present Situation Index fell sharply, while the Expectations Index slipped further into negative territory. Consumer appraisals of current business conditions became negative for the first time since September 2024. Perceptions of the current labor market also worsened, though remained within positive territory. Over the next six months, consumers expected both business conditions and the labor market to weaken. Consumers still anticipated their household incomes to rise, but less so compared to previous months.”

As usual, higher gasoline prices are driving the decline. “Consumers’ write-in responses regarding factors affecting the economy were mostly pessimistic in September. References to prices, the high cost of goods and services, and oil and gas prices in particular, rose to new heights, reflecting September’s surge in fuel costs. Comments about war/conflict eased this month but remained elevated. Consumers also frequently cited politics, trade, and employment in their write-in responses, though to a lesser extent.”

Year-ahead inflation expectations increased to 6.1%. This is definitely out of step with UMich expectations and market-based indicators like Treasury Inflation Protected Securities (TIPS). The 5-year breakeven inflation rate for TIPS has been in a narrow range of 2.2% to 2.6% for the past several years. Unfortunately, 5-year is the shortest maturity for TIPs.

Mortgage applications fell 6% last week as purchases fell 4% and refis fell 9%. Rising rates drove the decrease. “Mortgage rates jumped to their highest level in almost three years, pushing borrowers to the sidelines. The 30-year fixed rate increased for the sixth consecutive week to 7.3%, the highest rate since November 2023,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Mortgage applications fell by 6% due to the recent surge in rates, with purchase and refinance applications both declining to their slowest weekly pace since 2025. Government refinances declined 13%, with both FHA and VA applications experiencing double digit decreases over the week.

Stocks are higher this morning as oil prices stabilize and bonds find a level. Bonds and MBS are up small.

We are coming up on the end of the quarter, where asset allocators begin to make adjustments for the upcoming quarter. We could see some swings in the bond market over the next couple of days which will be exacerbated by the PCE report tomorrow.

Mideast oil exports are picking up as shippers become better at avoiding Iranian drones and other pipelines pick up the slack. Current Middle Eastern oil shipments are running around 80% of pre-war levels. Daily volume was 13MM barrels per day, which is much higher than the roughly 7.5MM / day we saw during the summer. So things are improving despite a stalemate on the hostilities side.

Delinquencies ticked up 14 basis points last month to 3.53% according to the ICE First Look. This is up 10 basis points on a YOY basis, but is still well below pre-pandemic levels. The seriously delinquent rate remained at 1.04% or about 574,000 homes.

Foreclosure starts ticked down 6%, but are up 29% YOY. Foreclosure inventory build was only 2,000 units to 89,000 units which is still up 41% YOY. Foreclosure volumes were depressed due to COVID-era restrictions, but are returning to more normal levels. The current foreclosure percent (0.54%) is more or less where we were in February 2020.

__________________________

The MBA Annual conference in Chicago is rapidly approaching. Are you looking to hedge a pipeline of non-QM loans or your servicing portfolio? CME Group lists SOFR futures including Eris SOFR Swap futures and are an excellent way to manage this risk. Plus, with the rollout of Eris Options this past summer, you have even more tools to tailor your strategy. Talk to John Douglas at john.douglas@erisfutures.com to book a meeting.

In addition, Eris Innovations will also have a cocktail hour on Monday afternoon. Space is limited. Please reach out to john.douglas@erisfutures be placed on the guest list.

___________________________

MBA CEO Bob Broeksmit laid out three ways the government could improve housing affordability. First, he says that FHFA could direct Fan and Fred to lower their LLPAs overall or do something for first time homebuyers. Note I wrote an article advocating just that earlier this year. He argued that the GSEs are charging too much in g-fees for the amount of risk they are taking.

“Housing is too big a part of the economy for it to flounder, and there are things we can do immediately to rejuvenate it,” Broeksmit stated.

He started with the guarantee fees and the loan-level price adjustments from the GSEs, both of which he categorized as “too high.”

“If you look at their quarterly profits and you look at the credit quality of the loans they close, there’s a big mismatch between the price they’re exacting and the risk they’re taking,” Broeksmit said.

“You could do that with an across-the-board change to LLPAs,” Broeksmit noted. “You could do it targeted to first-time home buyers, you could do it to certain loan amounts. You could turn it into a closing cost credit. There are myriad ways to do this.”

I like the idea of a LLPA adjustment targeted to first time homebuyers because it won’t just push up prices across the board which defeats the purpose.

He also said that FHA could lower its insurance premium as well and there could be something done on credit scores.

Stocks are lower as we head into the final week of the third quarter. Bonds and MBS are down. Again, this is not a US-centric phenomenon – global sovereign yields are up across the board.

The week ahead will contain a couple big reports, with the personal incomes and outlays report on the 30th which will contain the all-important PCE Price Index. The jobs report will come out on Friday. We will also get ISM data and home prices, the final estimate for Q2 GDP and consumer confidence.

The street is looking for a 0.2% MOM increase in the headline PCE Price Index and the core. The headline YOY PCE Price Index is expected to rise 3.7% while the core is expected to increase 3.3%.

For the jobs report, the street expects 162k jobs with the unemployment rate to remain unchanged at 4.1%.

Consumer sentiment fell in September according to the University of Michigan Consumer Sentiment Survey. This is the lowest reading in 4 months and is 15% lower than January. Deteriorating expectations for the future drove the decrease. Year-ahead inflation expectations increased from 4.0% to 4.6% while longer-term expectations rose from 3.3% to 3.4%.

Given that unemployment is sitting at 4.1% (a level that would have been unheard of in the 70s, 80s and most of the 1990s) consumers shouldn’t be so dour. What is the driver? Gasoline prices. Below I charted UMich sentiment versus gas prices. The blue line is sentiment while the green line (right axis) is gasoline. This is a very strong negative correlation. In other words, gas prices rise and consumers get surly.

Cleveland Fed President Beth Hammack said that inflation risks are tilted to the upside at an event on Friday. “Current ​conditions in the United States ​indicate that output is growing at a solid pace and the ​labor market remains close ​to my definition of maximum employment, but ‌inflation ⁠remains elevated,” Hammack said in comments opening a conference at her bank. “The inflation outlook ​continues ​to be ⁠highly uncertain, with risks tilted to the ​upside” and “the longer that ​high ⁠inflation persists, the more challenging and costly it can ⁠be ​to bring it ​back down,” she said.

“The longer that high inflation persists, the more challenging and costly it can be to bring it back down,” said the Federal Open Market Committee voting member. “Because monetary policy affects the economy with long and variable lags, we need a reliable way to separate temporary moves in inflation from changes that are more persistent.”

She also said that the recent sell-off in the bond market does not reflect a loss of confidence in the Fed.

China and the US agreed to cut tariffs on some $30 billion of goods. China gets relief on toys and Christmas decorations (good timing) while the US gets relief on agricultural goods.

Stocks are higher this morning as the bond vigilantes take a day off. Bonds and MBS are up.

Bonds got slammed again yesterday, with the 10 year yield pushing above 5.2%. Mortgage rates rose 11 basis points according to the Optimal Blue Mortgage Market Index. Generally speaking mortgage rates will lag the move in Treasuries, however that will become less tenable as bond market volatility increases. And yes, bond market volatility is increasing:

We are approaching the levels seen when the Iran War began. Again, this is a global phenomenon, not something that is US-centric. All of the major central banks are in tightening mode although the US has a higher inflation problem than most. But it also has higher growth. It feels like a lot of the action is oil-driven and if that is the case things will adjust. There are a lot of wells out there that were drilled when oil prices were in the 120-150 range that can be re-opened. That supply will come back on line the longer prices stay elevated. As they say in the commodities market: the cure for high prices is high prices.

That said, bond market cycles are long. The last cycle in the bond market began in the early 1980s when Paul Volcker was tightening to defeat 1970s inflation. It ended around 2021 when ultra-low interest rates began causing inflation. It feels like we are in a secular bear market in bonds that might last decades. That said even in secular bear markets, there will be opportunities.

What can borrowers / loan officers do? If you think this is temporary, then adjustable rate mortgages offer a way to lower the rate initially. I am not making investment advice, but Trump will be gone in just over two years. A new administration will almost certainly get rid of the tariffs, mend fences with our trading partners and find an off-ramp in the war with Iran. Things could look a lot different in a few years. The Fed might cause a recession, which will push rates lower. That said, the structural issues of deficit spending will not. So it isn’t a slam-dunk but it is something to consider.

New Home Sales rose 6.4% MOM to a seasonally-adjusted annual rate of 684,000 units. This is down 2.8% compared to a year ago. We have seen all of the homebuilders report a tough market out there, with resellers competing against new construction and tightening margins as builders throw in more amenities to entice buyers.

The median new home price rose 0.4% MOM and fell 5.8% YOY to $393,700. New home prices remain well below existing home prices as builders focus on smaller homes. There were 483,000 unsold units at the end of August, representing a 8.5 month supply.

This is the tough phase of the cycle for the builders. We are in late stages of a boom where the Fed is raising rates to quell inflation. Builders are early-stage cyclicals which perform best coming out of a recession. In this phase of the cycle, it is the time to make a shopping list of the defensives you want to buy when the music stops.

Stocks are lower this morning after bonds got crushed yesterday. Bonds and MBS are down.

There wasn’t any real catalyst that I saw for the bond market sell-off yesterday. The business press will attribute it to hawkish Fed comments from Barr or oil prices or economic strength because they have to cite something. It really wasn’t anything in particular. The global bond vigilantes who have been dormant since the mid-90s are back and they are running the show.

Fed Governor Mike Barr said: “In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” he said. “We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that.”

Note again it was global, with UK Gilts, German Bunds and Japanese Government Bonds all getting slammed. The JGB now yields 3.08%, which is up 101 basis points from the beginning of the year. The US 10 year and the JGB have taken the brunt of the abuse but it has been a bloodbath for sovereign yields this year.

The Fed Funds futures now see a rate hike in October and December as the base case scenario for the rest of the year. The June 2027 FF futures see a base case of 4.5% – 5% for the Fed funds rate.

At some point the US stock market will start paying attention – there is an old market saw that says “don’t fight the Fed.” The more time rates spend up at these levels the more the stock market is vulnerable to a sell-off. The stock market and the economy were able to take the 2022 tightening cycle in stride, but that isn’t necessarily a given this time around. The yield curve was much flatter then, and long-term bond yields were lower than today. Just something to keep in mind.

Business growth surged to its fastest pace in 5 years according to the S&P flash PMI. This is the fastest pace since 2021 during the COVID rebound.

The report suggests that growth is around 5%, which is consistent with the Atlanta Fed’s GDP Now Model. So we have a slew of estimates for Q3 ranging from the mid 2s to the high 5s.

The increase in growth is putting pressure on supply chains and prices however:

“However, this growth is being accompanied by some of the most severe supply chain bottlenecks seen in the near-two-decade survey history if the pandemic is excluded, with companies also reporting increasing problems finding suitable staff. Backlogs of work are consequently rising sharply. While this accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook.

“Firms’ input costs have meanwhile jumped in September at the steepest rate for four years, with fuel and transport costs spiking higher thanks to the rise in oil prices seen during the month, which will add further to the upward pressure on selling prices and inflation in the coming months.”