Morning Report: The US yield curve inverts

Vital Statistics:

 

Last Change
S&P futures 2890 -41.5
Oil (WTI) 55.49 -1.64
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.88%

 

Stocks are lower after disappointing overseas economic data. Bonds and MBS are up on the flight to safety.

 

Overnight, the US yield curve officially inverted with 2s/10s trading at negative 1.7 basis points.  This has historically been considered a recession indicator. You can see the chart below, which plots the difference between the 10 year bond yield and the 2 year bond yield, and not that the shaded grey bars (which represent recessions) have historically followed after the line goes to zero. One caveat to keep in mind however: In the past, we didn’t have the sort of activism out of central banks that we have now. Quantitative easing (where the central bank tries to directly influence long term rates) are a new phenomenon, and therefore investors should take that signal with a grain of salt. Still, it does speak to a global slowdown, and that will inevitably pass through to the US.

 

2s10s

 

The German Bund yields negative 64 basis points, which is a record low. Their economy contracted by 0.1% last quarter. This is what is driving stocks lower and bonds higher. The trade war is being blamed on their economic weakness. China reported the slowest industrial growth since 2002.

 

The FHA announced they will widen the credit box for condos, in an attempt to revive the entry-level condo market and help the first time homebuyer. “This is set to really expand homeownership,” said Ben Carson, secretary of the Department of Housing and Urban Development, which oversees the FHA. FHA will now begin insuring loans in unapproved buildings, provided no more than 10% of the units have a FHA loan.

 

Mortgage applications increased 21.7% last week as purchases increased 2% and refis increased 37%. The average contract interest rate fell from 4.01% to 3.93%, and has dropped about 80 basis points this year. The government refi index is at the highest level since 2013, driven by VA refis.

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Author: Brent Nyitray

Why do you need new bands? Everyone knows rock attained perfection in 1974. It's a scientific fact. - Homer Simpson

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