German Bund – The Daily Tearsheet

Morning Report: Online Black Friday sales surprisingly strong

Vital Statistics:

	Last	Change
S&P futures	3145	2.25
Oil (WTI)	56.39	1.24
10 year government bond yield		1.84%
30 year fixed rate mortgage		3.88%

Stocks are flattish this morning on no real news. Bonds and MBS are down.

A surprise election result in Germany over the weekend has pushed the German Bund yield up 8 basis points to negative 28 bps. Since global sovereign debt generally trades together, this will put some upward pressure on rates in the US.

We have quite a bit of economic data this week, with the ISM reports, construction spending and the jobs report. Given that the Fed is on hold, it probably won’t be that dramatic to the markets.

The FHFA lifted its conforming limits last week to $510,400 for a single family home. For high cost areas, the limit for a single family residence is now $765,500.

Pending Home Sales fell 1.7% in October, according to NAR. Lawrence Yun, NAR’s chief economist, noted the decline in inventory and a small rise in mortgage rates in October from September to, in part, explain this month’s signings drop. “While contract signings have decreased, the overall economic landscape remains favorable,” Yun said. “Mortgage rates continue to be low at below 4% – which will attract buyers – employment levels are strong and many recession claims have dissipated.”

Retailers are optimistic about the holiday shopping season after record online spending on Black Friday. The National Retail Federation estimates nearly 69 million Americans will scour the web for deals on everything from iPads and homeware to kids’ toys, and Adobe’s estimate of $9.4 billion would be a 19% increase on the same day a year ago.

Personal incomes were flat in October, while personal spending rose 0.3%. The PCE inflation indices were up 1.3%. The personal income number was a surprise, as wages and salaries have been growing, but falling interest income and rental income pulled down the number.

Morning Report: The US yield curve inverts

Vital Statistics:

	Last	Change
S&P futures	2890	-41.5
Oil (WTI)	55.49	-1.64
10 year government bond yield		1.61%
30 year fixed rate mortgage		3.88%

Stocks are lower after disappointing overseas economic data. Bonds and MBS are up on the flight to safety.

Overnight, the US yield curve officially inverted with 2s/10s trading at negative 1.7 basis points. This has historically been considered a recession indicator. You can see the chart below, which plots the difference between the 10 year bond yield and the 2 year bond yield, and not that the shaded grey bars (which represent recessions) have historically followed after the line goes to zero. One caveat to keep in mind however: In the past, we didn’t have the sort of activism out of central banks that we have now. Quantitative easing (where the central bank tries to directly influence long term rates) are a new phenomenon, and therefore investors should take that signal with a grain of salt. Still, it does speak to a global slowdown, and that will inevitably pass through to the US.

The German Bund yields negative 64 basis points, which is a record low. Their economy contracted by 0.1% last quarter. This is what is driving stocks lower and bonds higher. The trade war is being blamed on their economic weakness. China reported the slowest industrial growth since 2002.

The FHA announced they will widen the credit box for condos, in an attempt to revive the entry-level condo market and help the first time homebuyer. “This is set to really expand homeownership,” said Ben Carson, secretary of the Department of Housing and Urban Development, which oversees the FHA. FHA will now begin insuring loans in unapproved buildings, provided no more than 10% of the units have a FHA loan.

Mortgage applications increased 21.7% last week as purchases increased 2% and refis increased 37%. The average contract interest rate fell from 4.01% to 3.93%, and has dropped about 80 basis points this year. The government refi index is at the highest level since 2013, driven by VA refis.

Morning Report: German bonds set a record streak of negative yields

Vital Statistics:

	Last	Change
S&P futures	3023	1.5
Oil (WTI)	56.79	0.84
10 year government bond yield		2.07%
30 year fixed rate mortgage		4.04%

Stocks are flat as we await earnings from market heavyweights like Amazon and Alphabet. Facebook’s numbers beat the street, while Tesla disappointed. Bonds and MBS are down small.

New home sales came in weaker than expected, but at least exhibited positive growth. In June, we saw new home sales of 646,000, which was up 7% MOM and 5% YOY. New home inventory 338k units, which represents a 6.3 month supply.

Durable Goods orders rose 2% in June, according to Census. Ex-transportation, they rose 1.2%, and ex-transportation and defense they rose 3.1%. Non-defense capital goods orders (ex-aircraft) rose 1.9%, which shows that businesses are expanding capacity.

In other economic news, initial jobless claims fell 13k to 206,000.

The ECB opened the door to future stimulus this morning, saying they saw rates lower over the next 12 months. The German Bund is slightly stronger, however we are still close to record low yields at negative 37 basis points. The Bund set a record for the longest streak of days in negative territory – now 79. This eclipses the record set in 2016. What exactly does “negative yield” mean? It means the German 0s of ’29 is trading at 103.66. It is a zero coupon bond, meaning it pays no periodic interest. You pay 103.66 and on August 15, 2029, you will get back 100.

To get an idea of how much things have changed in Europe, remember the PIIGS? The PIIGS were an acronym for Portugal, Italy, Ireland, Greece, and Spain – all high-yielding sovereign debt that had fiscal issues. Where are they now? All yielding less than the US 10 year, with Greece at 1.95%, Portugal at 38 basis points, Ireland at 11 basis points, Italy at 1.48% and Spain at 33 basis points. Don’t forget, a huge swath of the European corporate sector trades with negative yields.

Most (if not all) of these countries have debt-to-GDP ratios well over 1, so we are seeing a real-time test of the hypothesis that government debt levels don’t matter. The granddaddy of debt to GDP ratios is Japan, sitting at 2.4x and its 10 year bond yields negative 15 basis points. Who knows how all this ends up, but we have a global sovereign debt bubble of epic proportions.

Bill Gross used to call the US the “cleanest dirty shirt” in the world. Indeed. For all the handwringing over debt to GDP ratios, the US debt to GDP ratio sits at just over 1, and a good chunk of that is owned by the Fed. Essentially, the low yields overseas cannot help but act as an anchor for US yields, which means unless the bubble overseas pops, I can’t see an impetus to push rates dramatically higher. And the first rule of bubbles is that they go on longer and go further than anyone expects.

Morning Report: Housing starts fall

Vital Statistics:

	Last	Change
S&P futures	2910	13.25
Oil (WTI)	51.78	-0.15
10 year government bond yield		2.03%
30 year fixed rate mortgage		4.15%

Stocks are higher as we begin the 2 day FOMC meeting. Bonds and MBS are up smartly on statements out of the ECB.

US rates are pushing towards 2% this morning after ECB President Mario Draghi signaled that the central bank could roll out further stimulus if inflation fails to materialize. The German Bund yields -32 basis points this morning (a record low), and US interest rates will have a hard time rising in this sort of environment. Simply put, bond investors will rotate out of bonds paying nothing into bonds paying something, even if they have to bear currency risk. It is preferable to locking in a sure loss by holding Bunds.

Housing starts fell to 1.24 million units in May, which was below expectations, but the prior two months were revised upward. Starts were down on a month-over-month and a year-over-year basis. Building Permits cam in at 1.29 million, which was more or less flat MOM and YOY.

Homebuilder sentiment slipped in June, primarily due to weakness in the Northeast and the West. That said, the index is solidly in the mid-60s, which is an overall strong level. Home prices have become stretched relative to incomes, but falling interest rates are offsetting that slightly. Rising costs for land and labor are making starter homes unaffordable for many first time homebuyers.

30 day delinquencies fell by 0.3% in March to a rate of 4.0%. Delinquencies are still being driven by hurricane-related issues. The foreclosure rate fell from 0.6% in March 2018 to 0.4% in March of 2019. Separately, ATTOM reported that there were 56,152 foreclosure filings in May, up 1% YOY, but down 22% from a year ago. Completed foreclosures were down 50%. The states with the highest foreclosure inventory are New Jersey, Florida, Delaware, Illinois.

Morning Report: US bond yields anchored by creeping Eurosclerosis.

Vital Statistics:

	Last	Change
S&P futures	2859	-7
Oil (WTI)	62.65	-0.48
10 year government bond yield		2.43%
30 year fixed rate mortgage		4.41%

Stocks are lower this morning on no real news. Bonds and MBS are flat.

The MBA Secondary Conference was held in NYC on Monday and Tuesday, and it seemed (at least to me) to be much more sparsely attended than in prior years. The most obvious example was the HUB or the conference floor, where there were about half the number of booths. You could see it in the major sessions, where the seats were maybe 25% taken. Of course the secondary conference is largely an off-site event where people go to the various hotels around Times Square for meetings, but it definitely looks like traffic was down this year.

The big topic was growth and how to achieve it. Generally speaking most originators were focusing on non-QM as well as renovation loans as the best way to drive growth. Mergers were also mentioned as a way to increase volume. Mohammed El-Arian forecasted that rates will go nowhere in the near future, anchored by negative rates in Europe. The German Bund is trading at a negative yield of 8 basis points (in other words you have to pay for the privilege of lending to the German government), and many money managers prefer to invest in positive-yielding US Treasuries and roll the dice on the currency risk than to lock in a sure loss in German Bunds. He also doesn’t see any sort of recession for at least the next two years unless a massive trade war breaks out internationally. You can see the creeping Eurosclerosis in the chart of the Bund yield below:

The Trump Administration is vetting Judy Shelton to fill a seat on the Federal Reserve Board. She is currently on the European Bank for Reconstruction and Development, which means she has already been through part of the confirmation process. She is in favor of keeping interest rates low, and has criticized the Fed’s methodology for setting the Fed Funds rate.

Existing home sales fell in April, according to NAR. They were down 4.4% from a year ago to a seasonally adjusted annual rate of 5.19 million. The median home price rose to 267,300 which is a 3.6% increase from a year ago. Inventory rose as well, to 1.83 million units, which represents a 4.2 month supply. Historically, 6 months would have been considered a balanced market, and we also have a mismatch between price points, where there is a glut of luxury properties and a shortage of entry-level homes. Days on market declined however to 24 days. “I think the market had a bit of a slow start in the Fall, but Realtors® all over the country have been telling me that April was a nice rebound. We’re hopeful and expect that this will continue heading into the summer,” said NAR President John Smaby, a second-generation Realtor® from Edina, Minnesota and broker at Edina Realty. “Homes over the last month sold quickly, which is not only a win-win for buyers and sellers, but it’s also great for the real estate industry.”

The mismatch between supply and demand is translating into more boomer empty-nesters staying in their homes. Trulia believes this is a matter of choice, but it may simply be the fact that there is not much demand for those 3,500 square foot homes. The demand is at the lower sizes and price points.

Mortgage applications rose 2.4% last week as purchases fell 2.4% and refis rose 8.3%. The average contract interest rate fell 7 basis points to 4.33%.