Morning Report: Yields are falling after the UK Government reverses course

Vital Statistics:

S&P futures3,65967.75
Oil (WTI)86.490.88
10 year government bond yield 3.93%
30 year fixed rate mortgage 6.97%

Stocks are higher this morning as bank earnings reports continue to come in. Bonds and MBS are up.

Global sovereign bond yields are falling as the UK reversed its tax plan which weighed on Gilts and the UK pound. Yields on UK Gilts fell 43 basis points overnight, which is pushing down yields on Bunds and Treasuries. IMO this accounts for the rally in Treasuries today. Bottom line: The Bond Vigilantes are back, and they just won a battle.

The upcoming week won’t have much in the way of market-moving data. We will get some housing data, with housing starts, existing home sales and the NAHB Housing Market Index. We will also get the Index of Leading Economic Indicators and industrial production data. The stock market will be driven primarily by earnings.

One thing to keep in mind with bank earnings – we are seeing a big effect from provisions for credit losses. In early 2020, banks took humungous provisions for loan losses due to COVID. Those potential losses never materialized, and by this time in 2021 many banks were reversing these provisions, which has the effect of increasing earnings. In other words, last year’s bank earnings were artificially high, which is creating some strange year-over-year comparisons, especially as banks are beginning to provision for credit losses in anticipation of further slowdowns in the economy. My point is this: year-over-year earnings comparisons should have an asterisk next to them.

Despite all of the fears in the market, residential mortgage backed securities backed by non-QM loans have mirrored their agency counterparts, exhibiting low delinquency rates. As expected, prepay rates have fallen, although that is less of an issue for non-QM RMBS as it is for agency.

Money quote: “Although voluntary prepayment rates have recently fallen, the share of delinquent loans remains low, new delinquency rates are low, serious delinquency cure rates are muted, liquidations are infrequent, loss severity rates are low, and losses are near zero. That said, non-QM RMBS will continue to face growing uncertainties with respect to the near-term economic growth, unemployment rate, household incomes, and home prices. Even if the delinquency rates rise somewhat due to the slowing economy, DBRS Morningstar considers existing non-QM RMBS to have a meaningful cushion to withstand the headwinds, barring a sharp economic downturn coinciding with a sharp drop in home prices.”

IMO, strong performance from non-QM paper should go a long way towards bringing back the buy-side into the non-agency market.


Author: Brent Nyitray

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

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