The Daily Tearsheet

Stocks are higher after investors return from a long weekend. Bonds and MBS are down.

The week ahead is relatively data-light, although we will get the consumer price index on Friday. Given the strong jobs report, a hot CPI reading will get the markets worrying about possible rate hikes this year.

Over the weekend, the two airmen shot down over Iran were rescued, and Trump gave a Tuesday ultimatum for Iran to open the Strait of Hormuz. Oil prices remain elevated and the 10 year bond yield is pushing 4.4%.

Jamie Dimon’s letter to shareholders was released over the weekend. The letter did spend a lot of time discussing how the wars will affect the economy, although he talked a bit about how much the relationship between banks and non-bank financial institutions have changed over the past 20 years.

The private credit market is getting a lot of attention these days, and this is ground zero for the discussion. The letter had a chart showing the change from 2010 (left column) and 2025 (right column)

One thing that jumps out is the nonbank share of mortgage originations. It was 9% in 2010. I guess that makes sense since Countrywide was dead and the new institutions that would dominate going forward were early on. The growth in loans held by nonbanks roughly mirrors the loans held by banks, but the private credit market is now $1.8 trillion, which is bigger than the high-yield bond market and the bank leveraged loan market.

On credit, he said:

I do believe that when we have a credit cycle, which will happen one day, losses on all leveraged lending in general will be higher than expected, relative to the environment. This is because credit standards have been modestly weakening pretty much across the board; i.e., more aggressive and positive assumptions about future performance (called add-backs), weaker covenants, more use of PIK (payment-in-kind; not paying interest in cash but accruing it), more aggressive private ratings (particularly in insurance companies) and more arbitrage (not always a great sign). Also, by and large, private credit does not tend to have great transparency or rigorous valuation “marks” of their loans — this increases the chance that people will sell if they think the environment will get worse — even if actual realized losses barely change. Additionally, actual losses right now are already a little higher than they should be, relative to the environment. Finally, if rates or credit spreads ever go up, the companies that borrowed will have to borrow at even higher rates, putting them under even greater stress. However this plays out, it should be expected that at some point insurance regulators will insist on more rigorous ratings or markdowns, which will likely lead to demands for more capital.

It has always been true that not everyone providing credit is necessarily good at it. There are many players who are late to this game, and it should be expected that some credit providers will do a far worse job than others. We have not had a credit recession in a long time, and it seems that some people assume it will never happen.

I think these comments could be applied to non-QM. We have a lot of new entrants in the DSCR space, and credit spreads have been quite frankly a lot tighter than they should be given the risks involved (specifically no government guarantee). Credit spreads overall remain tight.

The services economy declined in March, according to the S&P PMI. The index came in at 49.8 (any reading under 50 means a decline) which was the lowest level since January 2023. The war and price levels in general are depressing consumer confidence.

“The service sector has slipped into contraction for the first time since
January 2023, dragging the overall economy down to a near-stalled
0.5% annualized rate of growth in March. Worst hit is consumer-facing
service sectors where, barring the pandemic lockdowns, the downturn
reported in March was among the steepest recorded since data were
first available in 2009. However, financial services and tech, both of
which performed strongly last year, have shown some signs of weaker
performance amid financial market volatility and concerns over higher
interest rates, which have deterred investment.

“Key to the deteriorating growth trend is a pull-back in spending amid
worsening affordability, with costs and selling prices surging higher
in March amid spiking energy prices. The survey data are broadly
consistent with consumer price inflation accelerating close to 4% as
firms increasingly seek to push through higher costs onto customers in
the coming months.

The stock market is closed for Good Friday. Bonds and MBS close early today.

Note the futures markets are also closed today so the table below is yesterday’s closing levels.

The economy added 178,000 jobs in March, which was well above expectations. The unemployment rate fell from 4.4% to 4.3%. January’s payroll estimate was revised upward by 34,00 while February was revised downward by 41,000. This means we had a pretty unusual February, with January adding 160k, February losing 133k and now March adding 178k. Not sure what was driving the unusual activity in Feb.

That said, the internals of the household survey weren’t great. the drop in the unemployment rate was driven by people exiting the labor force. The labor force participation rate and the employment-population ratios declined by 10 basis points. The number of people not in the labor force rose by 488k, and the labor force itself declined by 400k. The number of people actually employed declined by 94k.

Regardless, since the Fed focuses on the unemployment rate, this report indicates that the labor market is not falling apart and makes them more concerned about inflation.

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Do you have a pipeline of non-QM locks you are looking to hedge? Or perhaps a portfolio of loans sitting on a conduit awaiting securitization? How do you hedge your exposure? A new paper from Eris Innovations on the topic outlines several methods used for hedging this growing market.

Hedging non-QM loans is different than conforming loans because they are not deliverable into a TBA. This means that hedging with TBAs can be ineffective. TBAs are probably better than nothing, but they aren’t the ideal solution. Other methods include using regression analysis to find the correct Treasury hedge, however this method is fraught with potential spurious errors or even non-sensical strategies due to data mining. 

Another method hedgers have tried is estimating prepay speeds and using SOFR swap futures to hedge accordingly. There is a wealth of prepay models out there for conventional loans. The problem is that non-QM loans often have prepayment penalties which means existing prepay models are unsuitable, but this method aligns hedges with the hypothetical funding that would hold the loans to their repayment and as such is a very effective method. 

The most advanced method is to use a discounted cash flow model using stochastic (i.e. probability) analysis. SOFR swap futures used to build the model are then used to hedge the portfolio. As a more precise method than the first three above, this method can result in the lowest hedging costs, and is the method of choice for sophisticated long term investors, but is equally effective for pipelines and inventory. 

If you want to learn more about hedging non-QM portfolios, read this article or contact John.Douglas@erisfutures.com.

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The woes in private credit funds continue, with Blue Owl noting higher-than-expected redemption requests. The company has capped redemptions at 5%. “We continue to observe a meaningful disconnect between the public dialogue on private credit and the underlying trends in our portfolio,” Blue Owl said in the shareholder letters.

Stocks are lower after Trump vowed to strike Iran harder, which sent oil higher. Bonds and MBS are down.

Last night Trump addressed the nation and said that military ops in Iran would be completed “very shortly” however we said the final days would see an escalation where he would hit Iran “extremely hard.”

The markets had been improving lately on hopes that the Iranian conflict would be completed sooner, rather than later. Last night’s speech did not support that forecast.

Separately, Trump has indicated that re-opening the Strait of Hormuz is a problem for other countries to solve. China and India get most of their oil from Iran, and Europe gets a lot from the Middle East as well. The US gets most of its oil from the US, and what imports it has it gets from the Americas – either Canada or Brazil.

The private sector added 62,000 jobs in March, according to the ADP Employment Report. Pay is improving. “Overall hiring is steady, but job growth continues to favor certain industries, including health care,” said Dr. Nela Richardson, chief economist, ADP. “In March, this solid performance was accompanied by a boost in pay gains for job-changers.”

Education / health services and construction saw the most job gains while Trade Transportation / Utilities saw the biggest decrease. Note Oracle just did a huge layoff announcement. Job stayers saw a 4.5% increase in pay while job changers got a 6.6% raise.

Job cuts rose 25% in March, according to outplacement firm Challenger Gray and Christmas. US employers reported 60,620, which was down big on a YOY basis given that the Federal Government was shedding workers at this time last year.

Technology is seeing a lot of cuts due to AI. “Companies are shifting budgets toward AI investments at the expense of jobs. The actual replacing of roles can be seen in Technology companies, where AI can replace coding functions. Other industries are testing the limits of this new technology, and while it can’t replace jobs completely, it is costing jobs,” said Challenger.

“The importance of upskilling and reskilling cannot be overstated. Workers need to familiarize themselves with AI, including prompting and generating assets. Many companies are now including goals for their workers on AI use and redefining job descriptions based on what AI can do.”

“One thing that is clear is that AI is changing work and the workforce. Workers will need to be more strategic as they lead AI-powered agents that handle increasingly complex tasks. Human workers will need strong decision making and judgment skills in the age of AI,” he added.

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Do you have a pipeline of non-QM locks you are looking to hedge? Or perhaps a portfolio of loans sitting on a conduit awaiting securitization? How do you hedge your exposure? A new paper from Eris Innovations on the topic outlines several methods used for hedging this growing market.

Hedging non-QM loans is different than conforming loans because they are not deliverable into a TBA. This means that hedging with TBAs can be ineffective. TBAs are probably better than nothing, but they aren’t the ideal solution. Other methods include using regression analysis to find the correct Treasury hedge, however this method is fraught with potential spurious errors or even non-sensical strategies due to data mining. 

Another method hedgers have tried is estimating prepay speeds and using SOFR swap futures to hedge accordingly. There is a wealth of prepay models out there for conventional loans. The problem is that non-QM loans often have prepayment penalties which means existing prepay models are unsuitable, but this method aligns hedges with the hypothetical funding that would hold the loans to their repayment and as such is a very effective method. 

The most advanced method is to use a discounted cash flow model using stochastic (i.e. probability) analysis. SOFR swap futures used to build the model are then used to hedge the portfolio. As a more precise method than the first three above, this method can result in the lowest hedging costs, and is the method of choice for sophisticated long term investors, but is equally effective for pipelines and inventory. 

If you want to learn more about hedging non-QM portfolios, read this article or contact John.Douglas@erisfutures.com.

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The manufacturing sector continued to expand in March according to the ISM Manufacturing Report. That said prices jumped due to problems in the Middle East. Most indicators fell.  

“In March, U.S. manufacturing activity remained in expansion territory, growing at a slightly faster pace than the month before. Of the five subindexes that make up the PMI^®, the New Orders Index indicated slower growth compared to the previous month, the Production Index grew at a faster rate, and the Employment and Inventories indexes remained in contraction. This month also marks the first report with panelists citing the Iran war as a new impact to their business, along with ongoing uncertainty with U.S. economic policy, despite the recent Supreme Court ruling striking down International Emergency Economic Powers Act (IEEPA) tariffs. In March, 64 percent of comments overall were negative. Among the negative comments, about 20 percent cited tariffs and about 40 percent the war in the Middle East. (Some panelists referenced both topics within a single comment or in mixed sentiment.)”

Stocks are higher as we begin a new quarter. Bonds and MBS are up. Markets are more optimistic of a quick resolution in Iran and for the Strait of Hormuz to re-open.

Home prices fell 0.11% on a MOM basis but still rose 0.9% annually in January, according to the Case-Shiller Home Price Index. The hip-to-be-square trade continues, with the New York, Cleveland and Chicago MSAs leading the charge, with erstwhile darlings like Tampa declining. Home price appreciation has been flattening out after the huge run up during the COVID years

The deceleration was prominent in the second half of the year, with home prices rising at a slower rate than inflation. This means that real (inflation-adjusted) home prices are slightly declining. While prices are elevated, affordability is improving albeit slowly.

Separately, the FHFA House Price Index rose 0.1% on a MOM basis and rose 1.6% annually.

Despite the situation in Iran, consumer confidence improved in March according to the Conference Board. “Consumer confidence ticked up again in March, as a modest improvement in consumers’ views of current conditions outweighed a slight downshift in expectations for the future,” said Dana M Peterson, Chief Economist, The Conference Board. “Three of five components of the Index firmed in March, and overall confidence improved modestly for a second month. Nonetheless, the Index has been on a general downward trend since 2021.” The present situation index improved markedly and was offset by a decline in expectations, undoubtedly driven by the war in Iran and worries over gas prices. Note that consumer sentiment indices tend to negatively correlate with prices at the pump.

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Do you have a pipeline of non-QM locks you are looking to hedge? Or perhaps a portfolio of loans sitting on a conduit awaiting securitization? How do you hedge your exposure? A new paper from Eris Innovations on the topic outlines several methods used for hedging this growing market.

Hedging non-QM loans is different than conforming loans because they are not deliverable into a TBA. This means that hedging with TBAs can be ineffective. TBAs are probably better than nothing, but they aren’t the ideal solution. Other methods include using regression analysis to find the correct Treasury hedge, however this method is fraught with potential spurious errors or even non-sensical strategies due to data mining. 

Another method hedgers have tried is estimating prepay speeds and using SOFR swap futures to hedge accordingly. There is a wealth of prepay models out there for conventional loans. The problem is that non-QM loans often have prepayment penalties which means existing prepay models are unsuitable, but this method aligns hedges with the hypothetical funding that would hold the loans to their repayment and as such is a very effective method. 

The most advanced method is to use a discounted cash flow model using stochastic (i.e. probability) analysis. SOFR swap futures used to build the model are then used to hedge the portfolio. As a more precise method than the first three above, this method can result in the lowest hedging costs, and is the method of choice for sophisticated long term investors, but is equally effective for pipelines and inventory. 

If you want to learn more about hedging non-QM portfolios, read this article or contact John.Douglas@erisfutures.com.

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Job openings fell to 6.88 million, in February, while January’s number was revised upward. The quits rate, which is a good barometer of the overall sentiment in the labor market continued to work its way lower, falling to 1.9%.

Mortgage applications fell 10% last week as purchases fell 2% and refis fell 17%. Rising rates from the Iran situation drove the decline. “The 30-year mortgage rate, now at 6.57%, reached its highest level since last August and is up half a percentage point from just one month ago. Refinance application volumes declined sharply again last week, dropping 17%, and are down more than 40% compared to last month,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Seasonally adjusted purchase application volume also declined over the week, but only by 3%. The headwinds of higher rates are being offset somewhat by the buyer’s market in many parts of the country – there are more homes for sale than buyers have seen in some time. Moreover, purchase applications for FHA and VA loans continue to hold up better than those for conventional buyers. However, the shocks of the jump in rates and the increase in overall economic uncertainty are likely having an impact on buyer confidence.”

Stocks are higher this morning as we wrap up a lousy Q1. Bonds and MBS are up.

Jerome Powell spoke yesterday and said that the increase in oil prices due to the war in Iran was not a reason to hike rates. “Inflation expectations do appear to be well anchored beyond the short term, but nonetheless, it’s something we will eventually maybe face the question of what to do here,” he said during a question-and-answer question with a moderator and students. “We’re not really facing it yet, because we don’t know what the economic effects will be, but we’ll certainly be mindful of that broader context when we make that decision … By the time the effects of a tightening in monetary policy take effect, the oil price shock is probably long gone, and you’re weighing on the economy at a time when it’s not appropriate. So the tendency is to look through any kind of a supply shock.”

Powell’s comments caused the Fed Funds futures to become more dovish, with the odds of a rate hike in April falling to a negligible amount from double digits just a few days ago. The December futures see no further action this year, although the odds favor a cut over a hike. A week ago, the December futures saw a 30% chance of a hike and a 6% chance of a cut. Today it is handicapping a 19% chance of a cut and a 4% chance of a hike. This is partially what is causing Treasury yields to work their way lower.

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Do you have a pipeline of non-QM locks you are looking to hedge? Or perhaps a portfolio of loans sitting on a conduit awaiting securitization? How do you hedge your exposure? A new paper from Eris Innovations on the topic outlines several methods used for hedging this growing market.

Hedging non-QM loans is different than conforming loans because they are not deliverable into a TBA. This means that hedging with TBAs can be ineffective. TBAs are probably better than nothing, but they aren’t the ideal solution. Other methods include using regression analysis to find the correct Treasury hedge, however this method is fraught with potential spurious errors or even non-sensical strategies due to data mining. 

Another method hedgers have tried is estimating prepay speeds and using SOFR swap futures to hedge accordingly. There is a wealth of prepay models out there for conventional loans. The problem is that non-QM loans often have prepayment penalties which means existing prepay models are unsuitable, but this method aligns hedges with the hypothetical funding that would hold the loans to their repayment and as such is a very effective method. 

The most advanced method is to use a discounted cash flow model using stochastic (i.e. probability) analysis. SOFR swap futures used to build the model are then used to hedge the portfolio. As a more precise method than the first three above, this method can result in the lowest hedging costs, and is the method of choice for sophisticated long term investors, but is equally effective for pipelines and inventory. 

If you want to learn more about hedging non-QM portfolios, read this article or contact John.Douglas@erisfutures.com.

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Non-QM delinquencies are picking up according to the latest research from DV01. “Since reaching an impairment low in Summer 2022, the Non-QM market continues to deviate from overall mortgage market strength, with performance trends mirroring those of the weaker credit FHA and VA markets. The past two years represent the toughest stretch of performance in the sector’s history even as the broader mortgage universe was setting record-low delinquency rates in March 2023 and more recently in June 2024. This trend magnified substantially in February, with performance rapidly deteriorating.”

Impairments are highest in the 80+ LTV space, with bank statement / P&L products having the highest rates. DSCR seems to be behaving a bit better.

Overall delinquencies in the government-guaranteed space are well below pre-pandemic levels, so this issue seems to be specific to non-QM.

Home insurance premiums are driving increases in delinquencies and relocations, according to a new research paper. Note that rising insurance premiums can make DSCR ratios thinner than they otherwise appear, especially in the context of flat asking rents.

Insurance premiums are rising relative to P&I payments:

“When insurance premiums rise, homeowners have limited ways to respond,” the paper said. “They can shop for cheaper coverage by switching insurers. Some people relocate to areas where insurance is less expensive. However, income-constrained households may be less likely to shop for lower-cost insurance and may find moving out of reach.”

“Instead, higher premiums can lead to greater reliance on credit cards, delayed mortgage payments and potential home loss. Because mortgages constitute a substantial share of household debt and bank assets, rising delinquencies can threaten broader financial stability,” the authors said.

Stocks are higher despite oil rising above $100 a barrel again. Bonds and MBS are up.

The week ahead will be dominated by the jobs report on Friday. We will also get job openings, ISM data, consumer confidence and home prices. We will also have a slate of Fed Speakers, including Jerome Powell on Monday.

Consumer sentiment declined in March, according to the University of Michigan Consumer Sentiment Survey. The index fell 6% to the lowest level since December 2025, due to the fallout from the war in Iran. “These patterns suggest that, at this time, consumers may not expect recent negative developments to persist far into the future. These views are subject to change, however, if the Iran conflict becomes protracted or if higher energy prices pass through to overall inflation.”

Year-ahead inflationary expectations increased from 3.4% to 3.8% while longer-run expectations fell to 3.2%.

Private credit’s exposure to the software sector is bigger than advertised according to research from the Wall Street Journal. Valuations in this SaaS sector have been taken down dramatically over fears that AI will upend their business model.

Many of these funds have put up gates, which restrict the amount investors can withdraw because the underlying investments are illiquid or unsaleable. The funds are massaging their sector definitions in order to minimize perceived exposure.

The risk to folks in the mortgage industry is largely non-QM as some of the ultimate buyers of non-QM paper have exposure to software. Credit problems have a habit of spreading, and non-QM’s proximity means it would be impacted. Any impact on conventional lending would be de minimus and could potentially be positive.

The bidding war between Cross Country Mortgage and United Wholesale over Two Harbors is over, with Cross Country winning. Two Harbors has entered into a definitive merger agreement with Cross Country, terminated its deal with United Wholesale and paid the termination fee.

Homes remain unaffordable in the first quarter, according to research from ATTOM. “Over the last several years, wages haven’t kept up with rising home prices in many markets,” said Rob Barber, CEO of ATTOM. “Mortgage rates dropped throughout last year, which offset some of that growing affordability gap, but shifts in the broader economic environment can still influence rates and home purchasing power.”

During the first quarter, mortgage rates generally declined, with the 30 year fixed rate mortgage falling below 6% before the war in Iran pushed up rates back towards 6.5%. Rising taxes and insurance costs are also impacting affordability. California and New York have the most unaffordable housing markets, while many of the most affordable are in Texas.

Stocks are lower this morning as hostilities continue in the Middle East. Bonds and MBS are down again.

Part of the problem in the bond market is being driven by fears of rate hikes in Europe. The German Bund yield (sort of the benchmark for Euro rates) is at a 15 year high. The move follows comments from ECB President Christine Lagarde that the Central Bank was prepared to raise rates if inflation spikes in response to the situation in Iran.

Note that we are seeing movement in the Fed Funds futures market. The December Fed Funds futures are handicapping a 51% chance that rates stay the same, and a 49% chance that the Fed hikes rates:

Fed Governor Michael Barr said that the Fed is in a good place with respect to monetary policy.

At the same time, a key concern right now is the trajectory for inflation. Separate from the effects of tariffs on goods inflation, nonhousing services inflation has also remained elevated. Core inflation, which excludes volatile food and energy prices and is a good guide to future inflation, likely was 3 percent in February, about where it was a year ago. The longer inflation remains above 2 percent, the greater the risk that it becomes entrenched in expectations, making it harder to achieve the FOMC’s goal.

Given the considerable uncertainty about the potential effects of developments in the Middle East on our economy, as well as the other factors I mentioned, it makes sense to take some time to assess conditions. Our current policy stance puts us in a good place to hold steady while we evaluate incoming data, the evolving forecast, and the balance of risks.

Prepay speeds and delinquencies increased in February, according to the ICE First Look. At the end of the month, 878,000 loans were seriously delinquent or in foreclosure, which is the highest level since June of 2022. This number is up 25% over the past 4 months. Foreclosure rates are coming off the pandemic-driven lows.

“February saw a clear rebound in prepayment activity, with speeds rising 14% month over month and 80% year over year as the wave of refinances triggered by lower rates in January reached closing,” said Andy Walden, Head of Mortgage and Housing Market Research at ICE. “Delinquencies also edged higher, driven by seasonal increases in early-stage delinquencies and a notable rise in seriously past-due loans, though overall delinquency rates remain below pre-pandemic levels. These dynamics bear watching in the coming months, as default activity continues to trend off recent record lows.”

DV01 reported a big increase in non-QM delinquencies. Total impairments were up 60 bps to 7.4%. Overall new DQs rose to 1.5%, while cure rates fell 180 bp to 20%. Payment made rates fell 160 bp to 42.4%.

Between the performance of NQM lending and the issues in the private equity market, the credit markets will not be amenable to an increase in rates.

Stocks are lower as the Iranian war drags on. Bonds and MBS are down.

Initial Jobless claims were flat at 210k last week.

President Trump has told aides that he wants to wrap up the Iran war in the next couple of weeks. Trump has a meeting with China in mid-May and wants the conflict resolved by then. He believes the conflict is in its final stages. Separately, Israel killed the Iranian Naval Commander responsible for blocking the Strait of Hormuz.

The situation in Iran is not helping prices. Import prices rose 1.3% in February after advancing 0.6% in January. Unsurprisingly energy prices drove the increase. Non-fuel import prices rose 1.1%, driven by increases in capital goods and food.

Export prices rose 1.5% in February, driven by capital goods and industrial materials.

14% of home sales fell through in February, according to research from Redfin. “Homes are falling out of contract left and right,” said Juan Castro, a Redfin Premier agent in Orlando. “Sometimes buyers make an offer but never send the deposit because they get nervous, sometimes they revisit numbers with lenders and don’t feel comfortable with the monthly payments, and other times they use a minor inspection issue as an excuse to back out. I’m also seeing buyers negotiate aggressively–for instance, maybe they ask for a brand-new roof because three shingles are missing on an otherwise perfectly good roof–then cancel the deal if the seller says no.”

Buyers have the upper hand these days and are backing out if they don’t like the results of an inspection. Oversupplied markets like Tampa and San Antonio are seeing the biggest number of cancellations.

Stocks are higher this morning on hopes of peace talks in Iran. Bonds and MBS are up.

The US issued a 15 point peace plan which calls for a 30 day ceasefire. Optimism over this plan is pushing down oil prices. While Iran and the US / Israel continue to be far apart, don’t forget that China needs Gulf oil and will increasingly lean on Iran to cut a deal.

Mortgage applications fell 10% last week as purchases fell 5% and refis fell 15%. Blame rising rates. “The threat of higher for longer oil prices continued to keep Treasury yields elevated, and mortgage rates finished last week higher. The 30-year fixed rate rose to 6.43%, more than 30 basis points higher than at the end of February and at its highest level since October 2025,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Given this period of increasing mortgage rates and diminishing refinance incentives, refinance applications decreased 15% as applications across all loan types declined. Purchase applications were also down last week, as higher mortgage rates, coupled with affordability constraints and economic uncertainty, pushed some potential homebuyers to the sidelines.

Business activity slowed to an 11 month low, according to the S&P Flash PMI. The war in Iran has increased uncertainty and rising energy prices aren’t helping things either. Input costs are rising, leading to the biggest jump since 2022.

“The flash PMI survey data for March signal an unwelcome combination of slower growth and rising inflation following the outbreak of war in the Middle East. Companies are reporting a hit to demand from the additional uncertainty and cost of living impact generated by the conflict. Travel, transport and tourism related issues are compounded by financial market jitters and affordability constraints, notably including concern over the impact of higher interest rates, surging energy prices and supply chain delays.

“The PMI data are indicative of GDP rising at an annualized rate of just 1.0%, with a modest 1.3% expansion signaled for the first quarter as a whole. The survey’s price gauges meanwhile point to consumer price inflation accelerating back to around 4%, hinting at a growing risk of the US moving into an environment of stagflation.”

Something to keep in mind about the Strait of Hormuz: not only oil is affected. Fertilizer prices are being pushed up as supply is choked off, and that will affect food prices. In the US, farmers import about 50% of urea fertilizer and stocks are 25% below normal. Nitrogen fertilizer has seen prices spike 40%. About a quarter of global nitrogen and LNG feedstock goes through the Strait. This will impact food prices, which is the last thing the US consumer needs.

The problems in the US are not only in commodity prices – the private credit issue shows the classic signs of a contagion according to ex-PIMCO chief Mohammed El-Arian. “The proliferation of such headlines increases the risk of what I call the ‘ATM’ scenario: investors forced to liquidate other healthy funds simply because they become the go-to source of available cash—even if those funds are fundamentally sound or operating in an entirely different asset class,” he wrote.

“It’s a classic contagion phenomenon: ‘If you can’t sell what you want, you sell what you can.'” He suggested that the problems we are seeing with Blue Owl and Apollo could be the “canary in a coal mine” like when BNP Paribas halted withdrawals in 2007, which is considered the precursor to the 2007 financial crisis.

Could we see another situation like 2008? I highly doubt it. 2008 was the end of a residential real estate bubble, which is not the case this time around. Yes, real estate prices are expensive compared to incomes, but the vast majority of residential real estate debt is Fannie and Freddie, which means it is guaranteed by the US Government. While there are non-QM DSCR loans out there, they are a very small fraction of the entire mortgage universe. The subprime and negative amortization (remember pick-a-pay loans?) are a distant memory.

Since the investors in DSCR and private credit play in the same sandbox, we could see some restriction of credit there, but it shouldn’t impact Fan and Fred lending. In fact, if the Fed senses that credit problems are spreading in the banking system, it will cut rates inflation be damned. This would cause the mortgage industry to de-emphasize non-QM loans and focus on easy rate / term refis.

Stocks are lower this morning as the Iranian war drags on. Bonds and MBS are up small.

Nonfarm productivity increased 1.8% in the fourth quarter as output rose 1.5% and hours worked decreased 0.2%. Unit labor costs rose 4.4%, driven by a 6.3% increase in compensation and a 1.8% increase in productivity. This was a substantial downward revision from the second estimate, driven primarily by an increase in unit labor costs.

The rise in labor costs is driven by rising compensation, which is generally a good thing but it won’t help the Fed with inflation. On the plus side, it does work at (slowly) attacking the affordability problem.

Construction spending fell 0.3% MOM in January according to the Census Bureau. It rose 1.0% on a YOY basis. Private residential construction fell 0.8% MOM and rose 2.3% YOY. Single family residential fell 0.2% MOM and 5.4% YOY. Multi fell 0.7% MOM and rose 0.2% YOY.

Chicago Fed President Austan Goolsbee said that monetary policy could go in either direction depending on what inflation does in the coming months: “We could be back to the environment with multiple rate cuts for the year, if inflation behaves. I could see circumstances where we would need to raise rates if it was going a different way and inflation was getting out of control,” Goolsbee said. He added that inflation is a bigger problem than the labor market: At the moment, I think inflation has got to be a little ahead of the employment.” Finally he is “fairly optimistic” that rates can move lower this year, although the war has “thrown a wrench into the plans.”

Stephen Miran is more dovish on rate cuts. “Looking 12 to 18 months out, there’s still not enough clarity to think that monetary policy itself should adjust in response to what has happened,” Miran said during an interview on Bloomberg Television. It’s still too early to conclude that the oil shock will bleed into inflation expectations, he added.

“If it looks like the oil shock is bleeding into inflation expectations beyond the first year, then you get really concerned about second-round effects,” he said. He’d also be worried if the shock appeared to cause a wage-price spiral.

Miran also drew a comparison between the oil shock when Russia invaded Ukraine and now. When Russia invaded Ukraine, monetary policy was highly accommodative: “That’s not the case right now. We’re not hitting the gas on demand that would interact with the higher oil price in a way that would reverberate through the economy right now. That’s not the case at all.”

The December Fed Funds futures see no further action out of the Fed as the most likely scenario, and are handicapping a 13% of 25 basis point increase in rates and 22% chance of a 25 basis point cut.

The private equity fund issue continues, with Apollo limiting withdrawals and paying out to investors about 45% of the capital they have requested. “Today’s decision reflects our ongoing commitment to long-term value creation for the Fund’s shareholders,” Apollo said. “As long-term stewards of capital, we have a fiduciary duty to act in the best interests of all Fund investors, balancing the interests of shareholders seeking liquidity with those who choose to remain invested.”

The private equity meltdown has the potential to spill over to the mortgage market, particularly the non-QM sector. Apollo has a lot of different funds, however it has been a big buyer of non-QM loans.

Mortgage REITs are generally a sleepy sector of the stock market. They are bought more for their high dividend yields than their stock price appreciation. Aside from moments of abject terror like the early days of COVID, they tend to be good additions for investors looking for yield. That is why it is unusual to see a bidding war for one.

Two Harbors is the subject of a 3 way bidding war between United Wholesale, Cross Country and an undisclosed third party. Two Harbors owns Roundpoint Servicing and a portfolio of agency RMBS and MSRs. The stock got caught up in the liquidity air pocket of 2020 with the whole sector and never really recovered. It does pay a fat dividend yield of 12.4%.