Morning Report: Mortgage rates rise while the yield curve flattens

Vital Statistics:

S&P futures4,60638.2
Oil (WTI)100.42-5.79
10 year government bond yield 2.44%
30 year fixed rate mortgage 4.94%

Stocks are higher this morning on potential peace talks with the Russia – Ukraine situation. Bonds and MBS are up.

Job openings came in at 11.3 million last month, according to the JOLTs jobs report. The quits rate ticked up to 2.9%, which is a harbinger of wage inflation going forward.

Consumer confidence improved slightly in March, according to the Conference Board. While consumers’ present situation is improving, their expectations about the future are weakening. High gas prices, rising food prices and the war in Ukraine are probably negatively affecting sentiment.

MBS spreads have been widening as we head into the end of the quarter. This means that mortgage rates are rising faster than Treasury rates. Much of this is based on fears that the Fed will start selling its portfolio of MBS. You can see the chart of it below as the divergence is widening.

I talked about yield curve inversion yesterday. Here is a better description of what I was talking about. Below is a chart of the 10 year bond yield minus the 2 year bond yield. When the 2 year bond yield is higher than the 10 year bond yield, the yield curve is said to be inverted. The shaded areas represent recessions. The signal was correct in 1980, 1981 and 1991. It lagged in 2002 and 2006, although the economy did enter a recession soon thereafter.

Anyway as I look at my Reuters screen, 10s-2s are at 5 basis points. The yield curve is indeed flattening, and this will be something to watch. The Fed may have painted itself into a corner and will have to cause a recession if it wants to quell inflation. I am sure they are hoping the supply chain issues will work themselves out, but I don’t know what will cause the tight labor market to reverse course. Even if wages aren’t rising super-fast they do create shortages and that cases prices to rise.

Speaking of shortages, we have a big one in housing. House prices rose 1.8% MOM in January and are up 18.2% on a YOY basis, according to the FHFA House Price Index. “House price trends notched up slightly in January,” said Will Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “Rising mortgage rates in January certainly reflect a major change from the past several years, but lending costs remain relatively low. The mortgage rate shift has not dampened upward price pressure from intense borrower demand and limited supply.”

Homebuilder KB Home reported earnings recently. Revenues were up 23% YOY as average selling prices rose 22%. “Our first quarter results reflect solid year-over-year growth, with diluted earnings per share increasing 44%. Market conditions are healthy, driven by a low supply of available inventory and favorable demographics, along with steady employment and wage growth. Against this backdrop, we produced a seasonally strong monthly absorption pace of 6.6 net orders per community, as demand for our personalized homes remained robust,” said Jeffrey Mezger, President, Chairman and Chief Executive Officer. “While we grew our revenues 23%, as the quarter progressed, supply chain issues intensified and an already-constrained construction labor force was further stressed, which extended our build times and delayed completions and planned deliveries. We will continue to work on addressing issues as they arise to navigate these challenges.”

In other words, the supply chain issues aren’t working themselves out – in fact they are getting worse not better. Metzger said on the earnings conference call that the challenge is completing homes, not selling them.


Author: Brent Nyitray

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

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