Morning Report: Global bond sell-off continues

Vital Statistics:

S&P futures3898-29.3
Oil (WTI)61.660.44
10 year government bond yield 1.31%
30 year fixed rate mortgage 2.97%

Stocks are lower this morning as commodity prices continue to increase. Bonds and MBS are down again.

Oil is flying this morning due to the Texas ice storm, which has taken something like 40% of all production off line.

The global bond sell-off continues, with the German Bund yield up 3 basis points to negative 35 bps. The UK Gilt is up 6 bps. This sell-off in sovereign debt is a global phenomenon and a global growth and commodities story. Global central banks have been on a mission to create inflation for a couple of decades and they haven’t been successful, so I am somewhat skeptical of this story. I think part of it is wishful thinking.

Housing starts took a step back in January, however building permits rose smartly to 1.88 million. This is 10% higher than December and 23% higher than last January. Housing starts hit 1.6 million, which was down 6% MOM and 2% YOY. Housing will be a big driver of the economy going forward.

The FOMC minutes gave some perspective on how they are seeing the economy.

The U.S. economic projection prepared by the staff for the January FOMC meeting implied a considerably stronger outlook for activity in 2021 relative to the December forecast. Although incoming data had been weaker than expected, the staff’s January projection incorporated the effects of the stimulus in the recently enacted Consolidated Appropriations Act, 2021 (CAA), together with an assumption that an additional sizable tranche of fiscal support would be put into place in coming months. Taken together, these stimulus measures were expected to partly offset the substantial drag on aggregate demand that would result from the unwinding of the fiscal stimulus enacted in the spring of 2020.

The Fed is putting a lot of stock in the power of stimulus spending, which may or may not have the desired effect. If people save the money (which could mean anything from sticking it in the bank to paying off credit card debt), the impact will be muted.

The Fed also noted that it made mistakes during the 2013 “taper tantrum” and this time around, they will be slow, deliberate and transparent in how they remove accommodation. I still believe that the Fed understands the easiest way to put money in people’s pockets is to allow them to refinance their mortgage at lower rates. This means they will try and keep mortgage rates low despite the movement in the 10-year.

As an aside, I was listening to Annaly Capital’s earnings conference call, and they made the point that a lot of the incremental demand for MBS is coming from banks, which are flush with deposits but are reluctant to make loans quite yet. Apparently loan to deposit ratios are at 40 year lows. Since that money has to go somewhere, it is finding a home in the resi MBS market. If the economy does have a healthy rebound in the second half of the year, that phenomenon will likely unwind, which will increase MBS supply and push mortgage rates higher.

Initial Jobless Claims rose to 861k last week, which was higher than expected. All of this talk about a second half rebound is a moot point if we continue to push a million initial claims a week. The recovery starts with hiring, and small business has been crushed over the past year.


Author: Brent Nyitray

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

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