Morning Report: 75% of the US Treasury market is under water

Vital Statistics:

Last Change
S&P futures 2773.25 10.1
Eurostoxx index 383.72 1.4
Oil (WTI) 74.01 0.21
10 Year Government Bond Yield 2.86%
30 Year fixed rate mortgage 4.50%

Stocks are higher this morning as trade war fears recede. Bonds and MBS are down.

Earnings season begins this week, with a bunch of the big banks reporting on Friday.

The biggest econ data will be the PPI and CPI on Wednesday and Thursday. For the most part it should be a quiet week.

Leandra English has resigned from the CFPB. She was the Deputy Director for Richard Cordray, and believed she should have been given the job instead of Mick Mulvaney. She sued in Court and lost. Now that Kathy Kraninger has been nominated, she is gone.

Donald Trump will announce his SCOTUS pick at 9:00 pm tonight. The favorites are Brett Kavanaugh and Thomas Hardiman.

Interesting stat: 75% of the US Treasury market trades under par. This is the highest percent ever recorded (we started measuring this in the 80s). In the past, it generally peaked around 50%, which happened at the end of Fed tightening cycles and was usually a buying opportunity. I would note that these were in the context of a secular bull market in bonds. In secular bull markets, you buy the dip. We are now in a secular bear market in bonds and that changes the dynamic.

100 years of interest rates

The REO-to-Rental Trade was a big winner over the past several years. Hedge funds and pension funds bought foreclosed properties for pennies on the dollar, fixed them up and rented them out, earning high single digit returns. As home prices rise, you would think these people will start ringing the register. Turns out they are doubling down. Professional investors are buying up homes in urban areas with good schools. This is making things even tougher for the first time homebuyer who is struggling to find a starter homes. That said, it isn’t a ridiculous number – last year major investors bought 29,000 homes, which is a drop in the bucket compared to total existing home sales of 5.45 million.

Morning Report: REO-to-Rental trade earned 9% over the past 5 years

Vital Statistics:

Last Change
S&P futures 2718.5 -4.5
Eurostoxx index 394.21 1
Oil (WTI) 72.15 0.66
10 Year Government Bond Yield 3.10%
30 Year fixed rate mortgage 4.65%

Stocks are lower this morning on bad earnings from Cisco. Bonds and MBS are down small.

The US and China will enter trade talks over the next couple of days. Both sides have signaled willing to make some compromises, so this could potentially be good for interest rates.

Initial Jobless Claims came in at 222k last week, while the Philly Fed improved to 34.4 which is a strong reading. The Index of Leading Economic Indicators rose a respectable 0.4%.

One of the reasons why starter homes have been so tough to find has been the REO-to-rental trade, where professional investors scooped up REO properties early in the crisis and rented them out. CoreLogic crunched the numbers and it turns out the trade made about 9% per year for the past 5 years. Impressive return in an environment of financial repression. Most of the return came from home price appreciation however, so if prices begin to level out, some of these professional investors will turn sellers. This is especially true if they had these properties in funds with a life. As short term interest rates rise, the low single-digit rental return will have more competition.

rental return

While longer-term bonds can be used as a proxy to estimate future inflation, Treasury Inflation Protected Securities represent a direct measure of inflationary expectations. The Fed invariably mentions TIPS in their meeting minutes. The breakeven rate of inflation has hit a 4 year high in this market at 2.2%. This means that an investor would need 2.2% in the consumer price index to be indifferent between buying Treasuries and TIPS, which pay a return equal to the interest imputed in the bond plus the consumer price index.

2/3 of the mortgage originated in April were purchase loans, according to Ellie Mae’s Origination Insight Report. Fewer loans in the pipeline is speeding up processing times, as the average time to close fell to 41 days. The average FICO score ticked up to 723.

CSFB thinks 3.5% on the 10 year will be the level to trigger a stock market exodus, although rates could stall out somewhere south of that for a while.

The hits just keep coming for Wells. The WSJ reports they added or changed information for some business customers during an anti-money laundering audit. Wells states that it was an internal matter only: “This matter involves documents used for internal purposes. No customers were negatively impacted, no data left the company, and no products or services were sold as a result.” This is only going to increase the voices in DC calling for the bank to be broken up. It already is not allowed to increase its balance sheet. At some point, it might make sense for Wells to spin off Wachovia and its securities unit.

GoBankingRates calculated what you can get for $300k in every state. The best value? West Virginia, where $300k will get you 3,347 square feet. Worst? Washington DC, which gets you 581 square feet.

The CFPB recently issued new rules to fix the TRID “black hole” issue.

CFPB Interim Chairman Mick Mulvaney reiterated his commitment to tame the CFPB by ending regulation by enforcement at NAR’s Legislative Trade Meeting and Expo. Student loan debt was also discussed, and while the CFPB doesn’t have a magic wand to make the debt go away they will continue to ensure that students understand the risks they are taking and also will go after predatory student loan collection practices.