News

What is “Repricing” in The Broader Context, And How is it Moving Markets?

We’ve been here before and we’ll be here again, but each time feels like a surprising new twist on what we think we know about bond market motivations.  The key word is “repricing,” and we’re not talking about lender rate sheets.  In this context, repricing refers to a broad understanding among certain market participants that rates need to move higher than they’re reasonably able to move in one trading day.  This results in seemingly paradoxical weakness that’s not obviously connected to data or events in a timely way.  Granted, data and events can help explain the weakness, but only in hindsight.  In other words, this is the type of selling momentum that sends analysts looking for explanations as opposed to the type that follows logically from new developments in data and events.

Econ Data / Events

Durable Goods

0.2 vs -0.5 f’cast, -5.6 prev

Nondefense, excluding aircraft

0.9 vs 0.0 f’cast, -0.4 prev

Market Movement Recap

08:46 AM Moderately stronger overnight and holding so far.  10yr down 4.7bps at 4.503.  MBS up just over an eighth.

10:28 AM Giving up some gains now.  10yr down only .6bps at 4.54 and MBS down an eighth of a point, with several ticks accounted for by illiquidity. 

01:09 PM Weakest levels of the day.  10yr up 5bps at 4.601.  MBS down almost 3/8ths. 

02:52 PM More selling.  10yr up 7.6bps at 4.626.  MBS down 3/8ths+
Source: Mortgage News Daily

Normally, when the bond market is in a pervasive selling trend, we’ll see a day or two of reprieve amidst the carnage.  Frequently, such days are friendly enough to lead to questions about whether they’re evidence of a bounce.  At the very least, when trading levels are much stronger on the morning after several days of big selling, the gains tend to do an OK job of sticking around through the close.  But that has definitely not been the case over the past two days.  Today is shaping up to be a simple carbon copy of yesterday, albeit with a bit of extra oomph. 

It’s possibly notable that the weakness is a centered on the center of the yield curve.  This could indicate some concession selling ahead of the 5yr Treasury auction, but that alone would not account for the reversal seen so far today.  More notable is the adjustments in Fed Funds Futures where traders are pricing in another 5-6bps by next year.  That’s the biggest move up since last week’s Fed announcement and it began around the same time the broader bond sell-off began.  
We don’t ever love oil prices as an explanation for intraday market movement, but the jump from yesterday’s lows could be getting some attention and contributing to strategic trading decisions that didn’t hit the market until the 9:30am NYSE open.

Last but not least, it is “month-end” on Friday and early month-end position squaring could also be contributing. 
Source: Mortgage News Daily

Today I head to Phoenix area for the AzAMP annual conference, and am reminded that, “Change is inevitable, except from a vending machine.” The mortgage industry is constantly changing, although Freddie and Fannie have been a somewhat stabilizing influence. But explaining to someone not in the mortgage business what they, the government sponsored enterprises (GSEs) do, is not easy, but in another one of his Mortgage Musings, attorney Brian Levy offers his thoughts on 15 years of being in conservatorship and whether that means it’s time to drop the “S” in GSE. Let’s just hope they don’t become another Amtrak. (Sign up for Musings here.) One topic that has come up at a few conferences, besides Agency buybacks, is demand for “LIP” and “VLIP” borrowers. Are F&F pushing hard for Low Income Purchase and Very Low Income Purchase business, and requesting high percentages of those products with the “threat” of hitting their overall pricing? Address any questions to your Agency rep, but some would say that in this environment, with everyone fighting for every deal and reduced volume, it doesn’t seem fair or even logical to have such a high demand for sellers with something outside of their control. (Today’s podcast can be found here and this week’s is sponsored by Built. Built is powering smarter and faster money movement for the entire construction and real estate ecosystem, all while reducing risk. Hear an interview with Verisk’s Kingsley Greenland on state level structural issues with property insurance and the current state of federal flood insurance.)
Source: Mortgage News Daily

The highest mortgage rates in 20+ years drove another decline in mortgage applications during the week ended September 22. The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of mortgage loan application volume, decreased 1.3 percent on a seasonally adjusted basis from one week earlier and fell by 2.0 percent on an unadjusted basis. The Refinance Index decreased 1.0 percent from the previous week and was 21 percent lower than the same week in 2022. The refinance share of mortgage activity grew to 31.9 percent of total applications from 31.6 percent the previous week. [refiappschart] The Purchase Index was 2.0 percent lower than the prior week on both a seasonally adjusted and unadjusted basis and was down 27 percent compared to the same week one year earlier. [purchaseappschart] According to Joel Kan, MBA’s Vice President and Deputy Chief Economist, “Mortgage rates moved to their highest levels in over 20 years as Treasury yields increased late last week. The 30-year fixed mortgage rate increased to 7.41 percent, the highest rate since December 2000, and the 30-year fixed jumbo mortgage rate increased to 7.34 percent, the highest rate in the history of the jumbo rate series dating back to 2011. Based on the FOMC’s most recent projections, rates are expected to be higher for longer, which drove the increase in Treasury yields. “Overall applications declined, as both prospective homebuyers and homeowners continue to feel the impact of these elevated rates,” he said. “The purchase market, which is still facing limited for-sale inventory and eroded purchasing power, saw applications down over the week and 27 percent behind last year’s pace. Refinance activity was down over 20 percent from last year and accounted for approximately one third of applications, as many homeowners have little incentive to refinance.”
Source: Mortgage News Daily

In terms of day-over-day changes, today’s mortgage rate movement was forgettable.  The average borrower wouldn’t see much of a difference from yesterday’s rates at the average lender.  In both cases, those rates would be at or near the highest levels since 2001. The underlying bond market experienced a bit more drama.  The early morning hours actually pointed to slightly lower rates, but those dreams were shattered by lunchtime.  Bonds had already lost a decent amount of ground by the time mortgage lenders released rates.  This kept lenders in a more conservative mindset, but several lenders were still forced to bump rates slightly later in the day as bonds lost more ground. Best case scenario rates remain near 7.5%, but many scenarios are seeing rates closer to 8%.
Source: Mortgage News Daily

Stronger Start, Weaker Finish, No Real Reason

Bonds improved in the overnight session, but reversed course the moment that the US bond market hit the 8:20am CME open.  The selling wasn’t intense, but it was consistent from that point on.  10yr yields ultimate set new long term highs just over 4.56 and MBS lost an eighth to a quarter.  The most interesting market mover of the day was the complete absence of compelling market movers.  This fits the “repricing” narrative discussed in the morning commentary.  The silver lining is that the day-over-day losses were far smaller than those seen yesterday, but it’s too soon to conclude bonds are settling in for next week’s big ticket data.

Econ Data / Events

Case Shiller Home Prices y/y

+0.1 vs -0.3 f’cast, -1.2 prev

FHFA Home Prices y/y

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Market Movement Recap

09:24 AM Initially weaker in Asia, but stronger in Europe.  Giving back some overnight gains.  10yr down 1.4bps at 4.517 and MBS unchanged to a few ticks lower.

12:18 PM Selling continued into PM hours.  10yr now up 1.3bps at 4.544.  MBS down just over an eighth. 

02:27 PM Treasuries continue to weakest levels with 10s up 2.9bps at 4.56.  MBS are down 3/8ths, but more than half of that weakness is due to illiquidity.
Source: Mortgage News Daily

August sales of newly constructed single-family homes failed to match the robust numbers from July but were significantly better than those a year earlier. The U.S. Census Bureau and Department of Housing and Urban Development said last month’s sales were at a seasonally adjusted annual rate of 675,000, the lowest since March and an 8.7 percent decline from July’s revised estimate (from 714,000) of 739,000 units. The August results were 5.8 percent higher than the 638,000-unit rate in August 2022. The August results did not meet the consensus estimates from either Econoday (699,000 annual units) or Trading Economics (700,000). Robert Dietz, chief economist for the National Association of Home Builders said of the report, “Builders continue to grapple with supply-side concerns in a market with poor levels of housing affordability. Higher interest rates (the average was over 7 percent) price out demand, as seen in August, but also increase the cost of financing for builder and developer loans, adding another hurdle for building.” On an unadjusted basis, there were 54,000 homes sold during the month, down from 61,000 in July. Over the first eight months of 2023, sales of new homes have totaled 474,000 compared to 466,000 at the same point last year. Sale prices have fallen slightly in the last 12 months. The median price in August was $430,300, $10,000 lower year-over-year. The average price has dropped from $530,800 to $514,000.
Source: Mortgage News Daily

The seemingly never-ending sea of red continues.  And for good measure, this one began with a bit of hope in the form of an overnight rally that got 10yr yields back below 4.50%. Not one moment after the official end of the overnight session, domestic traders started selling, pausing only briefly for the 9:30am NYSE open before taking yields to new multi-year highs in the 11am hour.  .

Like yesterday, there are no new or significant root causes for the weakness.  It’s the same old story of broad, large-scale “repricing.”  But what even is “repricing” in this context?  It’s a term we’ve only dusted off a few times over the past 15 years.  It occurred in 2013 surrounding the taper tantrum and in 2016 after the presidential election.  Those were examples of rapid repricing to higher yields.
There is a more gradual version as well, like the pervasive rally that took place in 2014 as the market repriced expectations for European QE and in 2019 as global growth concerns collided with the trade war and an oversold bond market.
In all examples, “repricing” refers to a sustained move in one direction that requires no new surprises from typical fundamentals.  In other words, econ data didn’t justify the scope or pervasive nature of these moves.  There was some deeper, underlying x factor that caused traders to identify a destination and then to proceed methodically in that direction.  The was abundantly clear in the first half of 2022–probably the single best example of a “repricing” event in modern economic history.
But here’s the kicker: that repricing has been underway since August of 2020.  That’s when bonds first began to lift off from the covid lows and when market participants first contemplated a future where trading levels weren’t tied to covid case counts.  It’s not as if the world knew yields needed to be over 4% at the time, but it was clear they needed to be higher.  In late 2021, we could similarly see that yields needed to be MUCH higher.
Now in late 2023, with 10yr yields already around 4.5%, I wouldn’t agree there’s as compelling a case for a repricing event, but that is nonetheless how the market is trading it.  It could be that it’s a short-term affair in reaction to last week’s Fed announcement, but only if next week’s data is week.  Otherwise, it’s just the market’s way of getting in position to finally not be surprised by surprisingly resilient big-ticket data.
Source: Mortgage News Daily

Home prices have resumed their upward climb despite mortgage rates that have doubled post-COVID. According to Craig J. Lazzara, Managing Director at S&P CoreLogic Case-Shiller Indices, the National Index for July hit an all-time high. That index, which covers all nine U.S. census divisions, rose 1.0 percent from the previous July, after posting zero change on an annual basis in June.  The 10-City Composite showed an increase of 0.9 percent after a 0.5 percent loss the previous month and the 20-City Composite was up 0.1 percent, improving from an annual loss of 1.2 percent. Chicago, Cleveland, and New York led the way for the third consecutive month reporting the highest year-over-year gains among the 20 cities in July. Chicago remained in the top spot with a 4.4 percent increase, with Cleveland (which has long vied with Detroit for the low spot in Case-Shiller’s numbers) was second, with a 4.0 percent annual gain.  New York held down the third spot with a 3.8 percent increase. Eight of 20 cities reported lower prices and 12 of 20 reported higher prices in the year ending July 2023 compared to prior annual numbers. Eighteen of the 20 cities accelerated at a higher rate than in June.   Lazzara said, “We have previously noted that home prices peaked in June 2022 and fell through January 2023, declining by 5.0 percent in those seven months.  The increase in prices that began in January has now erased the earlier decline, so that July represents a new all-time high for the National Composite.  Moreover, this recovery in home prices is broadly based.  As was the case last month, 10 of the 20 cities in our sample have reached all-time high levels.  In July, prices rose in all 20 cities after seasonal adjustment and in 19 of them before adjustment.
Source: Mortgage News Daily

As if lenders and vendors don’t have enough other stuff to worry about, the budgetary standoff in the U.S. doesn’t look like it will abate soon, raising the likelihood of the first government shutdown since 2019. Current funding for federal operations will end on October 1 unless a deal is reached or the proverbial can kicked down the road. Thousands of federal workers might be furloughed without pay. Sure it will be temporary, and its wider impact will likely be limited, but still even talking about it is lousy. According to Morgan Stanley, the last 20 government shutdowns that occurred since 1976 “appear to have had limited impact on the economy.” As for bond prices, a shutdown may cause some “temporary instability”, but this is not a given. There is talk of a short-term Continuing Resolution (CR) providing funding until later this year, but federal agencies, including HUD and Treasury, will cease to function normally. The National Flood Insurance Program (NFIP) authorities also expire on October 1st. The Mortgage Bankers Association created a guide outlining how HUD (including FHA and Ginnie Mae), VA, and USDA would be directly affected by the furlough of government employees and the curtailment of agency operations. (Today’s podcast can be found here and this week’s is sponsored by Built. Built is powering smarter and faster money movement for the entire construction and real estate ecosystem, all while reducing risk. Hear an interview with Servbank’s Bryan Crofford on how companies can best invest in employees, promoting longevity and success.)
Source: Mortgage News Daily