There’s certainly a chicken/egg problem when it comes to interest rate news. Is it the Fed’s decisions that move rates? Or do market forces move rates, thus forcing the Fed to react? The answer is somewhere in between. If inflation and economic growth were always positive, low, and stable, the Fed would never lift a finger, but they are compelled to act when stability is threatened. Since March 2020, the Fed has acted quite a bit. They maintained rate-friendly policies for almost 2 years and then got precipitously unfriendly early in 2022. “Unfriendly,” in this case, refers to hiking the Fed Funds Rate and buying fewer bonds on the open market. The combined effect was one of the sharpest rate spikes in history. Now after more than a year of unfriendliness, the Fed is finally thinking about leveling off and seeing how things play out without too many more rate hikes. They’ve already decreased the pace from 0.75% per meeting to 0.25%. This isn’t a random decision on the part of the Fed. It comes in response to shifts in inflation data as well as other signs that their unfriendly policies are having an effect on the economy. The latest sign is the banking drama that has been in the news this week. It began with Silicon Valley Bank last week but spiraled into a bigger problem with the closure of Signature bank over the weekend. Many people have never heard of these institutions, but they now represent the 2nd and 3rd largest bank failure in US history.
Source: Mortgage News Daily
Simple, Boring, Half Point Rally in MBS
There won’t be too many days with a half point MBS rally that are as boring as Friday. None of the economic data was very interesting or even exceptionally relevant. Most of the day’s motivation was set in the overnight session by a big move lower in European bank stocks and a sympathetic rally in sovereign debt. Treasuries were, in turn, sympathetic to EU bonds and MBS expressed some sympathy for Treasuries.
Econ Data / Events
Industrial Production
0.0 vs 0.2 f’cast
last month revised to 0.3 from 0.0
Market Movement Recap
09:37 AM Flight to safety led by EU bank stocks in late overnight trading. 10yr down almost 12 bps at 3.46. MBS up roughly 3/8ths of a point.
12:46 PM Best levels of the day at noon and losing some ground since then. MBS still up 3/8ths, but down 6 ticks from highs (.19). 10yr down 17bps on the day at 3.408.
04:38 PM Slight give-back in Treasuries, but not enough to ruin anyone’s day. 10yr down 14bps at 3.44. MBS up half a point.
Source: Mortgage News Daily
It hasn’t been a good few weeks for banks whose names begin with “Si” (Silvergate, Silicon Valley, and Signature, with Silicon Valley Bank declaring Chapter 11 bankruptcy this morning; today’s Rundown discusses how the bank crisis may impact lenders). Ah, those clever secondary marketing folks. Cornerstone’s Henry S. frets, “I can’t believe it’s bank collapse season already. I just finished taking down my train derailment decorations.” Certainly, time flies by, and I hope you’re wearing some green today. Originally a religious holiday to honor St. Patrick, who introduced Christianity to Ireland in the 5th century, St. Patrick’s Day has evolved into a celebration of all things Irish, with the first parade on March 17, 1762, in New York City, featuring Irish soldiers who served in the English military. It certainly is more fun to think about celebrating the Irish than the constant stream of headlines as people race to conjecture about the health of world banking, and people crying “shoulda woulda coulda.” The markets seem to be performing a stress test on the Fed. The Federal Reserve’s (Fed’s) tightening seems to be finally having an effect, and an early victim has been smaller banks that did a poor job of managing interest rate and deposit concentration risk. (Today’s podcast can be found here and this week is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology, and other services in the mortgage industry and in banking.)
Source: Mortgage News Daily
While there are no new bank failures in play, financial markets have traumatic memories from last Friday and last weekend. Better safe than sorry heading into 2 days without the ability to react defensively to any significant developments in the banking world. European shares are leading the flight to safety so far this morning and that’s spilling over into Treasuries (in a good way for rates) even though US stocks are doing a much better job of holding their ground.
In the chart below, notices the sharpest move and biggest retracement of yesterday’s range in Germany’s DAX equities index. While it’s not pictured, EU sovereign debt is following in lock step with lower yields, and that’s pulling US yields lower to start the day. US stocks are trying to rise above it all, and are actually doing an OK job so far. If they end up acquiescing to the flight-to-safety, it would likely only help Treasuries.
Source: Mortgage News Daily
Bank Lifelines Lead Bond Market Reversal
Financial markets continue feeling out prospects for global banking contagion. Yesterday was a more fearful day, so bonds rallied. Today was a more hopeful day, so bonds sold off. That simple.
Econ Data / Events
Housing Starts
1.45m vs 1.31m f’cast, 1.32m prev
Building Permits
1.524m vs 1.340m f’cast, 1.339m prev
Philly Fed Index
-23.2 vs -15.6 f’cast, -24.3 prev
Jobless Claims
192k vs 205k f’cast, 212k prev
Market Movement Recap
08:52 AM Mostly flat overnight with modest gains early and no reaction to data. MBS up a few ticks. 10yr down 3.7bps at 3.425
10:25 AM Some initial weakness after ECB press conference, but bouncing back now. MBS up an eighth and 10yr down 7.5bps at 3.388%.
10:57 AM Losing ground quickly on First Republic bailout headlines. MBS down more than a quarter point from highs. 10yr quickly up 8-9bps at 3.458.
03:34 PM Selling spree leveled off shortly into the PM hours. Holding fairly flat with MBS down 3/8ths on the day and 10yr yields up 10.5bps at 3.57.
Source: Mortgage News Daily
Mortgage rates are ideally determined only once per day, several hours into the business day. This gives mortgage lenders time to observe a baseline for trading levels in the bonds determine what they can charge. But those bonds trade all day and if things deteriorate enough, lenders can change rates in the middle of the day. Today was one of those days. The key considerations for bonds/rates at the moment are the fears and risks surrounding the global banking system. High profile bank failures prompt investors to ask “who’s next?” A downward sentiment spiral ensues and, left unchecked, can wreak havoc on financial markets. Regulators and other bankers have learned lessons from past examples of these sorts of panic spirals. They acted quickly. The Swiss National Bank provided a lifeline for troubled Credit Suisse and several domestic banks pledged to backstop First Republic’s deposits earlier today. It was the latter, specifically, that led a reversal in financial markets. Stocks and bond yields moved higher in unison. Higher bond yields mean higher interest rates. The average lender is back in line with Tuesday’s levels, or close to them. That means 30yr fixed rates are moving back into the upper 6% territory for top tier scenarios. If contagion fears continue to subside, there’s more room for rates to rise. If contagion fears flare up again, there’s also some room for rates to move down. The headline cycle will determine what our adventure looks like between now and next week’s Fed announcement on Wednesday afternoon.
Source: Mortgage News Daily
It didn’t approach the levels of the “good old days” of 2020 and 2021, but construction activity did show signs of life last month. The U.S. Census Bureau and the Department of Housing and Urban Development reported that both housing permit activity and residential construction starts rose sharply in February after a fairly lackluster performance in January. As in January, however, credit was largely due to multifamily construction. Permits for residential housing units were issued at a seasonally adjusted annual rate of 1.524 million units in February compared to 1.339 million in January. This was an increase of 13.8 percent. The figure, however, remains 17.9 percent lower than the February 2022 rate of 1.857 million units. The rate of permitting for single-family houses rose 7.6 percent to 777,000 units while multifamily permits were 24.3 percent higher at 560,000 units. Single-family permits were down 35.5 percent year-over-year, but the multifamily rate gained 16.9 percent on an annual basis. Prior to adjustment, the report puts the number of permits issued in February at 109,500 of which 58,200 were for single-family houses. The respective January numbers were 101,000 and 53,100. Permitting rose in three of the four major regions in February. The Midwest’s rate increased 9.6 percent, the South’s rose 10.9 percent, and permitting shot up 30 percent in the West. The Northeast was the outlier with a 2.8 percent decline. All regions performed well below their February 2022 levels, with deficits ranging from 11.4 percent in the South to 42.5 percent in the Northeast.
Source: Mortgage News Daily
While yesterday’s Credit Suisse concerns were serious, the last official major bank failure happened 5 days ago. That’s a very long time considering the way financial markets are trading. After all, a swift drop of more than half a percent in 10yr yields is a big deal.
Or is it? A shorter term chart gives a distinctly different impression versus a longer term chart. Ask the latter and we’re just consolidating in a wide range–still waiting to see if inflation and economic data justify additional Fed tightening.
The most definitive comments on that are likely to come from the Fed itself in just under a week.
Source: Mortgage News Daily
Have to buy something for someone in your life who has everything? If they’re a basketball fan, how about food smoked with the same type of wood used by NCAA basketball courts? News can be thrown at our biz has no rhyme or reason. Yesterday was one of those days, including the FHFA’s temporary hold on DTI pricing, detailed below. If you’d like some thoughts on the housing market after Silicon Valley Bank’s collapse, here you go, care of MCT. Along those lines, this Friday, “The Rundown” features Keith Little, President of Centennial Bank (Arkansas) discussing the bank failures from a banker’s perspective. Were regulators, auditors, and examiners doing their jobs? Speaking of regulators, my cat Myrtle, who is not a big fan of the CFPB, no doubt took note of yesterday’s announcement that the Consumer Financial Protection Bureau has launched an inquiry into companies that track and collect information on people’s personal lives. Some would wonder, isn’t that every government agency? And how ‘bout this: Is CNBC “recommending” lenders now? Who will read the warning at the top? “Select independently determines what we cover and recommend. We earn a commission from affiliate partners on many offers and links. Read more about Select on CNBC and on NBC News, and click here to read our full advertiser disclosure.” (Today’s podcast can be found here and this week is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology, and other services in the mortgage industry and in banking. Today’s has an interview with Richey May’s Michael Nouguier on the latest in mortgage cybersecurity.)
Source: Mortgage News Daily
Does Credit Suisse qualify as a “big bank” anymore? The company could be argued to be circling the drain for many months, but nonetheless holds hundreds of billions in assets. If it failed, it would be a big deal, and financial markets asked that question in a very serious voice today. All other things being equal, when financial markets are concerned about a global systemic banking crisis, it tends to put downward pressure on stock prices and bond yields. Bond yield is another term for interest rates. The bonds that underlie the mortgage market don’t react quite as swiftly as US Treasuries to these sorts of episodes, but the reaction was plenty big nonetheless. The average lender moved back down to levels seen on Monday. At the time, those were the lowest rates in more than a month. Whether or not rates remain in this territory (or lower) depends on the emergence of additional banking drama as well as the path of inflation and the economy. The only safe bet in the short term is for volatility to be elevated, for better or worse.
Source: Mortgage News Daily
