Morning Report: Why are Treasury yields falling?

Vital Statistics:

S&P futures4,629-17.2
Oil (WTI)71.27-1.18
10 year government bond yield 1.39%
30 year fixed rate mortgage 3.30%

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

Bonds continue to rally in the wake of the Fed’s tapering decision. Not sure what is driving this, but it looks like every expert is predicting higher long term rates, and Treasury yields keep working lower. This is even more apparent at the long end of the yield curve (the 30 year Treasury). Not sure why this is the case, but it would indicate that the Treasury market is sanguine about inflation and worried about the longer-term growth of the economy. To put this into perspective, you can lend to the US government for 30 years at a rate of 1.81%, while the CPI is pushing 7%. I wonder if the Chinese real estate implosion is driving demand for US risk-free assets.

While Treasury yields are falling, mortgage rates are stuck right around current levels. I think this is nothing more than a reflection that the Fed will reduce its purchases of MBS, and investors not wanting to bid up paper. Since we are in the seasonally slow period for MBS issuance, the effect of the Fed’s reduction will be somewhat muted. It will probably become more evident in the Spring when purchase activity picks up again.

Industrial Production rose 0.5% last month, which was a touch below expectations. Capacity Utilization rose to 76.8%. Historically, high capacity utilization numbers generally corresponded with higher inflation. During the 1970s, capacity utilization was around 85%. Capacity Utilization is less important these days since the US economy is driven more by intellectual property and services.

The number 1 reason why mortgages get declined (at 32% of declines) is too-high debt-to-income ratios. The second reason is a low credit score (26% of declines).

Home flipping profits are slowing down, according to ATTOM. “Home flipping produced another round of competing trends in the third quarter of this year as more investors got in on the action but got less out of it,” said Todd Teta, chief product officer with ATTOM. “It’s clear that declining fortunes weren’t enough to repel investors amid a typical scenario of 32 percent profits before expenses on deals that usually take an average of five months to complete. We will see over the coming months whether the amount they can make on these quick turnarounds will still be enough to keep luring them into the home-flipping business or start pushing them elsewhere.”

Still amazing that Zillow managed to lose money flipping houses in this market.


Author: Brent Nyitray

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

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