Bond Yields – The Daily Tearsheet

Morning Report: 90% chance of ZIRP by the end of the month

Vital Statistics:

	Last	Change
S&P futures	2819	-145.25
Oil (WTI)	31.96	-9.49
10 year government bond yield		0.46%
30 year fixed rate mortgage		3.26%

Don your crash helmets, it is ugly out there. Stock index futures are limit down. Bonds and MBS are up.

The 10 year is trading at 0.46% after hitting a low of 0.33% in the overnight session. Granted, the Asian overnight session can be illiquid and whippy, but that is shocking. Oil is down 22% due to a tiff between Saudi Arabia and Russia. The German Bund hit a new record low yield, trading at -88 basis points.

The 30 year Treasury is up 10 points. 10. points. The yield is 0.88%. Astounding. The chart of the iShares 20 year government bond ETF looks like an internet stock circa 1999.

TBAs are participating in the bond market rally, but not like the 10 year. The 10-year bond is up 3.375 points this morning. 2.5% TBAs are up 1/2 of a point, and 3% and higher notes are up a quarter. So rates will be better this morning, but not by as much as you think they should. Also, many correspondents have full pipelines, so they will be adding margin to their rate sheets. We may see little to no improvement over Friday. Just be prepared to explain that to your borrowers.

The March Fed Funds futures are predicting a 90%+ chance that the Fed will cut to zero at the March 18 meeting. The site cautions that the March 3 cut has made the probabilities somewhat inaccurate, but the bet is that we are back at ZIRP by the end of the month. Don’t discount the possibility of another intra-meeting cut. Check out the Feb 7 predictions… roughly a 90% chance of a 2% Fed Funds rate. Now it is a 90% chance of a 0% Fed funds rate.

The week after the jobs report is usually data-light and this week is no exception. The only numbers of note are inflation, and those aren’t going to make any difference.

There are now 110,000 confirmed cases of Coronavirus. There are just under 30,000 cases outside China. 554 are in the US and it has resulted in 21 deaths. Italy is taking drastic measures to quarantine people, so if you had planned a trip to Milan or Venice this spring, you might want to re-think it.

Morning Report: Bond yields flirting with 2016 lows

Vital Statistics:

	Last	Change
S&P futures	3251	-88.25
Oil (WTI)	51.16	-2.19
10 year government bond yield		1.38%
30 year fixed rate mortgage		3.63%

Stocks are lower this morning on overseas weakness, as investors continue to fret about Coronavirus, which is spreading beyond Asia. Bonds and MBS are up (yields down) on the flight to safety trade.

The 10-year Treasury is trading just off the lows of 2016, where it hit 1.36%. FWIW, that is a modern historical low – long term rates never fell below 2% even in the Great Depression. How low can rates go? The thing about bubbles is that they on longer and further than anyone expects. How many people are talking about a sovereign debt bubble? It hasn’t even registered yet.

Existing Home Sales fell 1.3% MOM in January to an annualized rate of 5.46 million. Lawrence Yun, NAR’s chief economist, finds the outlook for 2020 home sales promising despite the drop in January. “Existing-home sales are off to a strong start at 5.46 million.” Yun said. “The trend line for housing starts is increasing and showing steady improvement, which should ultimately lead to more home sales.” The median existing home price was $266,300 up 6.8% from a year ago. The first time homebuyer accounted for 32% of sales.

Fannie and Freddie will be freed with “limited and tailored” government backstops, according to US Treasury Secretary Steve Mnuchin. SIFMA has warned that removing the explicit government guarantee from Fannie and Freddie’s MBS would have a devastating impact on the market. Remember during the crisis, a trial balloon was floated about removing the government guarantee, and Bill Gross shot it down with a howitzer. No mention was made of what will happen to current stockholders.

Wells agreed to pay $3 billion to settle DOJ and SEC cases over the fake accounts scandal. Whether this will permit the company to begin growing again remains to be seen. The Fed has restricted growth in Well’s balance sheet since 2017.

Morning Report: 30 year treasury yield near a record low

Vital Statistics:

	Last	Change
S&P futures	2871	-14.5
Oil (WTI)	54.49	-0.44
10 year government bond yield		1.69%
30 year fixed rate mortgage		3.85%

Stocks are lower this morning after the Argentinian markets blew up overnight and the Hong Kong airport remains occupied by protesters. Bonds and MBS reversed their rally and are down after the Trump Administration announced they would delay the tariff increases on Chinese goods until mid-December. They were scheduled to take effect September 1.

The German Bund yield has hit a record low at negative 61 basis points. While the 10 year bond yield is still some 30 basis points from a record, the 30 year bond is getting close at a yield of 2.13%. Note that with the 10 year yield of 1.63% is lower than the dividend yield of the S&P 500.

Some economic data this morning: the consumer price index rose 0.2% MOM / 1.8% YOY, which was a touch higher than the Street forecast. Ex-food and energy, it rose 0.3% / 2.2%. The CPI remains pretty much where the Fed wants it, and is not going to be the driver of Fed policy, at least in the near term. Like it or not, the Fed is watching the markets and following them even if the signal-to-noise ratio is heavily distorted.

Small Business Optimism continued to increase as the index improved in July. Despite all of the handwringing in the business press over growth small business continues to grow and invest. Biggest headwind? Labor. The top concern of business was finding quality labor at 26%, which is a record. 57% reported capital expenditures, which means they have enough confidence to invest in infrastructure to grow their businesses. Only 3% of businesses reported not having their credit needs met, which is close to historical lows and kind of begs the question of what the Fed hopes to accomplish with lowering rates.

Mortgage delinquency rates continued to fall, hitting 20 year lows for most of the country. 30 day DQs fell to 3.6% and the foreclosure rate fell to 0.4%. The only areas with elevated DQ rates are in the Midwest and Southeast and are the result of flooding.

Fitch is out saying that GSE reform will probably not result in near-term downgrades.

Morning Report: Global bond rout on

Vital Statistics:

	Last	Change
S&P futures	2919.25	-12.25
Eurostoxx index	381.23	-2.61
Oil (WTI)	76.03	-0.38
10 year government bond yield		3.20%
30 year fixed rate mortgage		4.87%

Stocks are lower this morning in the face of a global government bond rout. Bonds and MBS are down.

Global bond yields are sharply higher this morning. There doesn’t appear to be any particular catalyst, but it is affecting Japanese and German bonds as well as the US. The 10 year yields 3.2% this morning after starting yesterday at 3.08%. Interestingly, the Fed Funds futures haven’t changed at all, so this doesn’t seem to be driven by a re-assessment of Fed policy. If you look at the TIPS market (Treasuries that forecast the change in CPI), there is no change in the market’s assessment of inflation. So this has been largely confined to the long end. The short Treasury trade is one of the biggest trades on the Street, and maybe some big funds put more money to work shorting / underweighting global bonds going into the 4th quarter. 2s-10s are trading at 31 bps.

Jerome Powell was interviewed on CNBC yesterday, and signaled that more hikes are on the horizon. “Interest rates are still acommodative, but we’re gradually moving to a place where they will be neutral,” he added. “We may go past neutral, but we’re a long way from neutral at this point, probably.” Interesting to see him characterizing current policy as “accomodative” when the word was taken out of the September FOMC statement. The “may go past neutral” comment has been cited by some in the press as the catalyst for yesterday sell-off, but the Fed Funds futures don’t reflect that.

Job cuts rose to 55,000 in September, according to outplacement firm Challenger, Gray and Christmas. This was driven primarily by announced layoffs at Wells Fargo. “As the job market remains near full employment and companies struggle to find workers, large-scale job cut announcements like the one from Wells Fargo will actually provide the workers necessary for companies to gain momentum and sustain growth,” said John Challenger, Chief Executive Officer of Challenger, Gray & Christmas, Inc.

Hurricane Florence appears to have had little impact on initial Jobless Claims which fell to 207,000 last week. As companies ramp up for the fourth quarter, qualified workers are hard to find. That might have been part of the reason for Amazon’s announcement on wages – they have to compete with everyone else for seasonal workers. Note that Fed-Ex is paying pilots bonuses of $40-$110k to keep them from retiring.

Lennar reported 3rd quarter earnings yesterday, which were decent, but forward guidance (partially driven by Hurricane Florence) was disappointing, and the stock sold off 2%. Orders increased, but its Q4 forecast was below estimates. The whole sector was hit yesterday as well, as a combination of higher mortgage rates and input costs are creating affordability problems. Most of the metrics were hard to compare YOY because of the CalAtlantic transaction.

Factory orders increased 2.3% in August driven by transportation orders. This is the fastest pace since September last year.

Investors are bailing on high-yield debt, as spreads to Treasuries are at post-crisis lows and rates are going up. With bond-like upside and stock-like downside, the risk-reward for the asset class is deteriorating. IMO, some of the action we are seeing in the stock and bond markets may simply be a re-emergence of money market investment vehicles which paid so little during the ZIRP years that investors didn’t bother with them. With short term rates pushing 3%, the asset class is making sense again.

Of course the other asset class that has been moribund since the crisis has been the private label MBS market. While there are governance issues left be sorted out, higher absolute rates will go a long way towards bringing back that sector (and the type of lending that accompanies it). Mortgage REITs who have feasted on MBS thrown overboard in 2009 and 2010 will have to replace that paper with new issuance.

Morning Report: Existing home sales flat

Vital Statistics:

	Last	Change
S&P futures	2926	11.5
Eurostoxx index	382.7	2.72
Oil (WTI)	71.58	0.46
10 year government bond yield		3.09%
30 year fixed rate mortgage		4.86%

Stocks are higher this morning after China agreed to cut some tariffs. Bonds and MBS are getting slammed.

Bond yields are up 27 basis points over the past month. Not sure what is driving that (at least nothing specific), but it is a worldwide phenomenon. Bunds and JGBs have also been selling off, though not as dramatically. The Fed funds futures have become more hawkish over the same period, raising the probability of a Dec hike from 63% to 87%. This has certainly stopped the flood of hand-wringing stories in the business press about the flattening yield curve.

Initial Jobless Claims hit a 50 year low, and are within striking distance of the 200,000 level. Meanwhile, the Index of Leading Economic Indicators took a step back in August, rising 0.4% after July’s torrid 0.6% growth. Still strong numbers, however.

Consumer comfort rose to a 17 year high, according to the Bloomberg Consumer Comfort Index (highest since Jan 2001).

One reason why consumption has been strong is growing home equity, which rose almost a trillion YOY in the second quarter. This is an increase of 12.3%. The number of homes with negative equity fell by half a million to 2.2 million, or about 4.3% of all mortgaged homes. On average, the typical homeowner saw a $16,200 increase in housing wealth. Only 3 states: North Dakota, Connecticut, and Louisiana saw declines.

Existing home sales remained flat in August, according to NAR. Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.” The median house price was $264,800, up 4.6% YOY. Inventory is still tight, at 4.1 month’s worth, and days on market ticked up slightly to 29 days. First time homebuyers accounted for 31% of sales. Historically, that number has been closer to 40%.

Closing rates jumped across the board to 71.7%, according to Ellie Mae’s Origination Insight Report. Average FICOs were 724, and average LTV was 79%. Both those numbers are more or less unchanged YOY. It typically took 43 days to close a loan.

When is the best time of year to buy a home? It depends. Prices do decline however during the winter, with purchases in January and February 8.5% cheaper than the peak summer months. Even in Autumn, they fall 3%. So, don’t get too depressed about your Z-scores during the winter months. It could be just seasonality.