Morning Report: Flight to Safety continues

Vital Statistics:

 LastChange
S&P futures4,357-10.2
Oil (WTI)100.945.63
10 year government bond yield 1.79%
30 year fixed rate mortgage 4.09%

Stocks are lower this morning as the risk-off trade continues. Bonds and MBS are up.

The markets continue to buy sovereign debt in a flight to safety. The German Bund yield went below 0% overnight and is now sitting right above 0. The 10-year flirted with 1.7% as well.

We are seeing big moves in commodity prices again, with wheat trading at 982, up 23% since before the invasion. WTI Oil is above $100 a barrel.

I suspect that mortgage originators will get a break yet again as yields work lower and mortgage grudgingly follow. I suspect this will take a while to work out. Maybe 2022 won’t be as bad as people are fearing. Unless things take a turn south in the overall bond market, margin calls shouldn’t be an issue for lenders.

The thing I am going to watch closely is credit spreads and whether we see an impact on the banks. Some of the usual suspects in Europe (SocGen, Deutsche Bank) are taking a beating on this Russian situation, and Raiffeissen getting smoked, down almost 50% since January 31. The Russian market is more or less uninvestable at this point, and might even get downgraded from an “emerging market” to a “frontier market.” Note Russian stocks are halted again today, and Euro exchanges are beginning to suspend Russian GDRs from trading.

If credit spreads begin to widen, it will have reverberations in the mortgage market. First and foremost, it will cause a flight to safety, which means that Treasury yields will fall. It will also be beneficial to Fannie and Freddie mortgage backed securities since those are more or less guaranteed by the US Government. Non-QM might take a hit. That said, rising home prices provide a benign backdrop for housing credit.

Jerome Powell heads to the Hill tomorrow and Thursday for Humphrey-Hawkins testimony. I am not sure what he can realistically comment on Ukraine except to say that the Fed will be monitoring the economic data closely and react accordingly. Investors are paring back bullish bets on rate hikes. The March Fed Funds Futures are now pricing in only a marginal chance of a 50 basis point hike.

The December futures are centering around an end-of-year Fed Funds rate of 1.25%. They were looking at 1.75% pre-invasion.

Home Prices rose 19.6% in February, according to the Clear Capital Home Data Index. This is the most timely real estate index out there. The West and South saw prices rise 23%, while the Northeast and Midwest rose about 15.5%. Separately, home prices rose 19.1% in January, according to CoreLogic. They are expected to rise 3.8% next year.

Author: Brent Nyitray

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

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