Stocks are lower this morning as oil prices and bond yields continue to rise. So far MBS spreads are tightening to offset the move up in the 10 year.
The situation in the Strait of Hormuz continues to pressure bond yields. Fire was exchanged while one ship was hit by an unknown projectile in the Strait. Iran is urging the US to return to the June deal. Shipping traffic in the Strait of Hormuz is back down to something like 5 ships a day – a far cry from the 100 we used to see before hostilities.
The sell-off in bonds is not limited to the US – it is global. The yield on the Japanese Government Bond is 3%, and it is up almost 90 basis points this year. The 10 year is up 60. The German Bund is up close to 50, and the UK Gilt is up 60. So this sell-off is an overall rejection of sovereign debt. China’s long-term debt is holding steady, which is to be expected since they are dealing with the aftermath of a real estate bubble.
MBS spreads and corporate bond spreads are narrowing, which means that yields are rising on these products as well, just not as much as the 10-year. This is a good sign for the economy overall – it means that it is handling higher rates well.
Meanwhile, Trump is meeting with the CEOs of the big refiners to see if there is a way to expand capacity and push down gasoline prices. Note West Coast refiners are dealing with onerous state regulations in CA and WA which is pushing them to leave these markets. The deal with Venezuela to increase production could help, but ultimately crack spreads march to their own drummer. Venezuelan production has been depressed for years, and the hope is that the US can help it get back to normalcy.
_____________________________________________
As anyone who hedges their pipeline knows, volatility is the enemy of margin. Big moves in the markets can depress loan bids and make hedges underperform. Swaptions provide a way to buy some insurance against that risk. If you are hedging your MSR portfolio or Non-QM loans for sale, SOFR swaptions may be a good fit.
Exchange traded swaptions also have the benefit of no upfront premium, no counterparty risk, and better execution than a over-the-counter (OTC) option. In an OTC transaction, you contact a bank who will “take the other side” of your trade. So they can sell you an expensive option and then buy it back cheaply when you want to exit since they know your position (or “which way you are”). On an exchange, you will get better pricing because the counterparties are anonymous and have no knowledge about your position.
Contact John Douglas at www.erisfutures.com to learn more.
The CME has an article discussing exchange-traded SOFR swaptions, which are options on Eris SOFR Swap Futures. It is a good backgrounder on how they work, what the advantages of them are, and talks about how you don’t need to be a huge bulge bracket bank anymore to take advantage of them. Lower margin requirements are also helpful for mortgage banks who need to maintain maximum liquidity.
The article is an excellent backgrounder for those who want to learn more about how these instruments are traded. Anyone thinking about hedging non-QM and MSR positions should take a deep dive and understand the possibilities.
_________________________________________
Kevin Warsh’s comments at Jackson Hole have bumped up the odds for a rate hike at the 15-16 September meeting. The odds currently stand at 67% for a 25 basis point hike and 33% for no change. We will get this Friday’s jobs report and next week’s CPI report before the meeting. If Friday’s jobs report shows a rebound after July’s disappointing 23,000 drop (or that number is revised upward), expect the futures to price in a bigger chance of a hike.
Foreclosures starts picked up in July to 39,906 which is up 10% on a year-over-year basis. “The increase in foreclosure starts and completed foreclosures compared to last year shows that financial pressures remain a factor for some homeowners,” said Rob Barber, CEO at ATTOM. “However, the broader context is important. Foreclosure activity remains relatively low by historical standards. While annual increases have become more common, current volumes indicate that the market remains relatively resilient overall.”
Texas, Florida, and California had the biggest increase in starts.
Interesting chart: Stocks have outperformed bonds by the most since the Kennedy Administration. Either stocks are wildly overvalued or bonds are wildly undervalued. I’ll let you guess which one is the case.
