Stocks are lower as global yields move higher. Bonds and MBS are down again.
We will have a 10 year auction at 1:00 pm today and the FOMC minutes at 2:00. So we could see some volatility around rates during that time, especially if investors turn their nose up at the auction. The minutes will prove interesting, however the Fed Funds futures are decidedly predicting no change in policy at the October meeting.
NY Fed President John Williams said there is “no need for urgency” in continuing to hike rates. The move in the 10 year over the past month fulfils much of the same role as an increase in the Fed Funds rate. San Francisco Fed President Mary Daly also indicated that an October rate hike might be unnecessary.
The global sovereign debt sell-off continues, with UK Gilt yields up 11 basis points today. French and Italian sovereign yields are up big, with the French OAT up 15 basis points and the Italian BTP up 14. Since global sovereign yields tend to correlate, this is pushing down govvies across the board.
European yields are diverging, indicating investors are getting skittish again about some of the Southern European sovereigns. The spread between the French OAT and the German Bund (the German Bund is still the benchmark for Europe) is now 138 basis points, compared to about 70 at the beginning of the year. The impact on US bonds should be minimal, unless it simply means investors are souring as sovereign debt as an asset class. It is tough to call the sell-off a global risk-on trade given that the breadth in the S&P 500 is pretty lousy. A few big names that dominate the index are driving it higher, while vast swaths of US stocks languish.
It isn’t clear where the money exiting sovereigns is going. It isn’t going into MBS because spreads are widening. There are reports that investors are shortening duration (in other words selling the 10 year and buying 3 month T bills to roll over as the Fed hikes rates.
Mortgage applications fell 4.2% last week as purchases decreased 2% and refis fell 8%. Mortgage rates hit their highest levels in 3 years. “Mortgage rates moved to their highest level in almost three years last week, with the 30-year fixed rate reaching 7.49% as both Treasury rates increased and spreads widened with the increase in rate volatility,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Very few homeowners have an incentive to refinance at these rates, and the jump in borrowing costs has caused many potential borrowers to step back from the purchase market. With rates roughly a percentage point higher than a year ago, refinance applications last week were at the lowest level since 2025 and fell to less than half of last year’s pace.”
By my calculations, the P&I payment on the median home at the prevailing mortgage rate has increased by 20% YTD. So while home prices are falling in real terms (i.e. rising slower than inflation) affordability isn’t being improved because of rate movement.
On the refi side, yes rates are a headwind, but as mortgage rates increase so do credit card rates and other revolving debt. A cash-out debt consolidation refi can still make a lot of sense for a borrower struggling with credit card debt.
Homeowners in the Northeast who generally use heating oil can expect to see big bills this winter. Prices are expected to be $5.26 a gallon, up 34% from a year ago. Luckily we have a strong El Nino, which generally leads to milder winters in the Northeast. That said, heating oil bills for the winter are expected to run about $2,115, up 21% from a year ago.
Blame refining capacity shortages. Global supply disruptions are blowing out crack spreads which influence the price of distillates independent of the level of crude oil.
I will be at the MBA Conference in Chicago if anyone wants to meet. Should be an interesting conference given the move in rates.
