|10 year government bond yield||2.46%|
|30 year fixed rate mortgage||4.87%|
Stocks are lower this morning on no real news. Bonds and MBS are down.
We have a decent amount of data this week, with home prices (Case Shiller and FHFA), the third revision to first quarter GDP, and the jobs report on Friday.
The first quarter of 2022 has been a record bad year for bonds, going back to 1973. The Bloomberg US Treasury Index has lost 6.5% this year. The move has intensified since the March meeting as investors re-calibrate expectations for further rate hikes this year. The Fed Funds futures are looking at end-of-year Fed Funds rates between 2.5% and 2.75%.
The big question is whether this sort of tightening will trigger a recession. The data is mixed on tightenings and recessions. That said, if the yield curve inverts then that is a very strong recessionary indicator. We are already seeing some flattening – the 5 year and 30 year spread is zero. If we see a 2.5% Fed Funds rate by the end of the year, and the 10 year is sitting below that, watch out. FWIW, the Fed is about to embark on a tremendous amount of tightening, and it is an open question whether the economy is strong enough to take it.
As bonds sell off, mortgage rates are moving inexorably higher. Below is a chart of just how far they have moved over the past few months.
The name of the game going forward will be purchases and cash-out debt consolidation refi. The beautiful thing about cash-out debt consolidation refis is that if you are paying 18% on credit card debt, it doesn’t matter whether your mortgage rate is 4% or 4.75% – it is still a smart transaction.
As rates rise, profits fall for independent mortgage banks. In the fourth quarter of 2021, mortgage banks earned an average pre-tax margin of 38 basis points, down from 89 basis points in the third quarter, according to the MBA. Believe it or not, that is still a decent number – in 2018 independent mortgage bankers earned almost nothing.
We are seeing more an more layoffs, with Maxex cutting about a third of their staff. PennyMac is making cuts as well.