Morning Report: Morgan Stanley calls for yields to rise 100 basis points

Vital Statistics:

	Last	Change
S&P futures	3338	37.6
Oil (WTI)	38.15	1.29
10 year government bond yield		0.88%
30 year fixed rate mortgage		2.87%

Stocks are higher as we head into election day. Bonds and MBS are down small.

The share of loans in forbearance fell by 7 basis points last week to 5.83%, according to the MBA. “With more borrowers exiting forbearance in the prior week, the share of loans in forbearance declined across all loan types,” said MBA Senior Vice President and Chief Economist Mike Fratantoni. “Almost half of forbearance exits to date have been from borrowers who remained current while in forbearance, or who were reinstated by paying back past-due amounts.”

Apparently Morgan Stanley was out with a call yesterday calling for markedly higher bond yields, with the 10 year yield rising 100 basis points. Apparently the analyst is using 2016 as a template, where an unexpected Trump victory translated to a big “risk on” trade where investors sold Treasuries and bought stocks. Regardless, traders are betting on volatility stemming from the election. As MBS investors know, volatility is kryptonite for the asset class. And sort of dislocation in the bond market will translate into lower MBS pricing, which in turn means higher mortgage rates at the margin. FWIW, with global sovereign debt at or close to record lows, COVID, a Federal Reserve who wants low rates, and a lot of uncertainty regarding the disease and the recovery, I am not seeing the case for higher rates, but I guess anything is possible these days.

Construction spending rose 0.3% MOM and 1.5% YOY in September, according to the Census Bureau. Residential construction was up 2.7% MOM and over 10% YOY. That said, office and lodging spending was down.

Home prices rose 1.1% MOM and 6.7% YOY, according to CoreLogic. They are predicting flat prices going forward however.