Morning Report: Global bond sell-off

Vital Statistics:

S&P futures3899-27.3
Oil (WTI)59.66-0.44
10 year government bond yield 1.29%
30 year fixed rate mortgage 2.93%

Stocks are lower this morning on no real news. Bonds and MBS are flat.

The increase in US bond yields yesterday was driven by a few strategists saying that inflation could return in the back half of 2021, and we should see a rapid rebound due to stimulus payments. There is a global story being told as well, with expectations of a recovery as people get vaccinated. We have seen the German Bund (which is the German 10 year bond) increase in yield from -55 basis points to -35 basis points. The Japanese 10 year is also around 10 basis points. In other words, the bond sell-off in the US is being driven by global forces as well as US ones. Regardless, we are seeing mortgage rates push up, with the average 30 year mortgage rate rising 5 basis points yesterday.

The Fed has stressed that it wants to maintain an average of 2% on inflation. This means that it is prepared to let inflation run above 2% for a while in order to bring up the average. The Fed will almost certainly maintain the current policy through this year and probably well into next year. The Fed Funds futures contracts did begin to start handicapping a rate increase in late 2023, but the overall policy stance should be set for the foreseeable future.

Mortgage Applications fell by 5.1% last week as purchases fell 6% and refis fell 5%. “Expectations of faster economic growth and inflation continue to push Treasury yields and mortgage rates higher. Since hitting a survey low in December, the 30-year fixed rate has slowly risen, and last week climbed to its highest level since November,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The uptick in rates has slightly dampened refinance activity, with MBA’s index falling for the second week in a row, and the overall share dipping below 70 percent for the first time since last October.”

The Producer Price Index (a measure of wholesale inflation) came in hotter than expectations. The index rose 1.3% MOM and 1.7% YOY. Ex- food and energy and trade services it rose 1.2% MOM and 2% YOY.

Retail sales were strong in January, with the headline number rising 5.3% overall. The control group which excludes autos, gas and building supplies rose 6.1%.

Industrial Production rose 0.9% in January, while manufacturing production rose 1%. Capacity Utilization rose to 75.6%.

Western Alliance Bank just agreed to buy Amerihome for $1 billion in cash. This price is about 1.4 times book value. Western Alliance recently bought Galton Funding as well, and has always been a big name in warehouse lending. The deal is expected to be 30% accretive to EPS and add 500 basis points to ROE.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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