News

You Have Gone Zero Days Without a Systemic Contagion Flare-Up

As of Tuesday, the global financial market was able to say it had gone “2” days without a systemic banking contagion flare up.  But that number dropped to “0” in the overnight trading session as investors aggressively sold Credit Suisse stock.  Other EU banks were dragged down as well.  US investors sold stocks first and asked questions later.  Once those questions were asked, the move began to reverse, but not nearly enough to erase the day’s bond market gains.  Any time this “days without a flare up” sign has a “0” on it, bonds should be doing well.  If that number starts ticking higher, rates might feel like doing the same. 

Econ Data / Events

Retail Sales

-0.4 vs -0.3 f’cast, +3.2 prev

Core Y/Y Producer Price Index

4.4 vs 5.2 f’cast, 5.4 prev

NY Fed Manufacturing

-24.6 vs -8.0 f’cast, -5.8 prev

Market Movement Recap

11:02 AM Sharply stronger overnight on Credit Suisse cliff diving.  Fed Funds Rate outlook leading the way so 2yr notes are down 44bps while 10s are “only” down 26bps to 3.42.  Remember 3.42?  MBS are lagging, which is to be expected amid another flight to safety.  5.5 coupons are up roughly 5/8ths with an eighth point margin of error due to illiquidity.

01:01 PM Rally continues.  10yr down almost 27 bps at 3.42.  MBS up 2/3rds of a point in 5.5 coupons.  

02:38 PM Plenty of weakness since 1pm with additional selling now after Swiss regulators are said to release a statement soon on a Credit Suisse backstop.  MBS up only a quarter point on the day, down a half point from highs.  10yr yields still down 17bps at 3.517, but up more than 10bps from lows. 

04:01 PM MBS gradually recovering since 2:30pm ET.  Back up by roughly half a point, or slightly more after adjusting for illiquidity.  10yr down 21.6 bps at 3.47.
Source: Mortgage News Daily

The Ides of March… And college basketball time. Here in Kentucky (men #6 in the East, Louisville women’s team #5) I overheard someone on the phone. “Yesterday I saw a woman in Walmart with March Madness teeth. She was down to her final four.” March Madness is in full swing, whether it is hoops or bonds. Or bank stocks. Is this really a fundamental structural plunging of the United States’ financial system? Doubtful. Moody’s came out with a warning about downgrading certain banks in the United States. It is not 2008. How much of this is psychology? Tweeting causing a run on deposits? Banks everywhere are looking at their liabilities (deposits, since they owe their depositors money) and assets (the money lent out using their depositor’s money, or securities owned. “Lending long and borrowing short” works when banks can pay very little on their deposits (like checking accounts earning 0 percent) and take that money and earn 4 or 6 percent on securities. But when the deposit base becomes unstable, and a bank has to liquidate those securities at 80 or 90 cents on the dollar, it becomes a problem fast. (Much more below.) 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 Bank of England Mortgage’s Quinton Harris on the art and science of forecasting the housing, mortgage, and bond markets.
Source: Mortgage News Daily

After systemic banking fears died down earlier in the week, Credit Suisse and other European banks are saying “game on!”  Stock prices of said banks led a market-wide sell-off in equities overnight.  Bonds rallied on the flight-to-safety, and yields are now back near Monday’s lows.

With the Fed in the midst of the typical 11-day communications blackout ahead of the next meeting, speculation has been running fairly wild as to how recent events affect the rate outlook.  To be fair, most of the “running wild” is a product of the new itself.  The Fed’s blackout period only adds a modest amount of uncertainty.
If you ask financial markets, everyone is fairly certain the Fed still hikes 25bps next week.  After that, it’s anyone’s guess as Fed Funds Futures suggest rate cuts on the horizon.  The overnight news brings December’s Fed rate outlook to even lower levels than those seen on Monday.

Long story short, the overnight move resets the board to be roughly in line with Monday morning.  It’s like one of those placards at the work place that boasts “number of days without an accident.”  We got up to “2” yesterday, and rates had risen accordingly. Now it’s back to zero, even though the Credit Suisse rout isn’t the same sort “accident” as SVB or Signature. 
Source: Mortgage News Daily

Mortgage application volume increased for a second straight week as investors fled to the safety of government-guaranteed securities in the wake of three bank failures, and fears of depositor runs on several large regional banks. The Mortgage Bankers Association (MBA) said its Market Composite Index, a gauge of loan application volume, rose 6.3 percent on a seasonally adjusted basis during the week ended March 10. The index was 7 percent higher before adjustment. Joel Kan, MBA’s Vice President and Deputy Chief Economist said, “Treasury yields declined late last week, as market concerns over bank closures and the potential for broader ripple effects triggered a flight to safety in Treasury bonds. This decline pushed mortgage rates for all loan types lower, with the 30-year fixed rate decreasing to 6.71 percent, Home-purchase applications increased for the second straight week but remained almost 40 percent below last year’s pace. While lower rates should buoy housing demand, the financial market volatility may cause buyers to pause their decisions.” [purchaseappschart] The Refinance Index increased 5 percent from the previous week but was 74 percent lower than the same week one year ago.  The refinance share of total applications decreased to 28.2 percent s from 28.9 percent the previous week. [refiappschart] Kan noted that, while refinance activity was still well below that of a year earlier when it held a 48 percent market share, and rates are still more than 2 points higher, the dip did bring some borrowers back, as evidenced by the 5 percent increase in refinance applications last week.
Source: Mortgage News Daily

Where’s the 4th Biggest Bank Failure?

With the 2nd biggest bank failure in history on Friday and the 3rd biggest over the weekend, it isn’t entirely insane to keep an eye out for imitators. This was a concern as recently as the wee hours of the night when Fed Funds Futures moved to roughly 4% implied yields for the meetings coming up after next week’s. As hours ticked by without another failure, that number moved up about half a percent.  This has been the dominant theme today with CPI not having much of an impact.  MBS fared far better than Treasuries, mostly because Treasuries fared so much better than MBS up until the reversal. 

Econ Data / Events

M/M Core CPI

0.5 vs 0.4 f’cast/prev

Y/Y Core CPI

5.5 vs 5.5 f’cast, 5.6 prev

Market Movement Recap

08:35 AM Moderately weaker overnight. Some volatility after CPI data, but shaking it off.  10yr up 2.8bps at 3.575.  MBS unchanged on the day.

09:53 AM Back to weakest levels as markets begin to unwind the recent ‘risk-off’ trade.  Stocks are up big and bond yields are following.  10yr up 12.3bps at 3.668.  MBS down 3/8ths on the day.

01:40 PM Choppy and sideways through mid-day hours, but gaining a modest amount of ground in the afternoon–at least in longer-dated Treasuries.  10yr still up 7.6bps on the day at 3.623.  MBS down 6 ticks on the day (.19). 

02:58 PM Sideways grind continues with MBS down an eighth and illiquid at times.  10yr yields are up 9.3bps at 3.64
Source: Mortgage News Daily

Mortgage rates made substantial gains yesterday as financial markets underwent a classic flight to safety.  This involves selling riskier assets like stocks and buying fixed-income assets like bonds.  When investors buy bonds, it puts downward pressure on interest rates, all other things being equal. The flight-to-safety began with the 2nd biggest bank failure in history late last week.  It’s continuation made sense in light of the 3rd biggest bank failure over the weekend.  Monday came and went without the 4th or 5th biggest bank failures in history, so panic began to wane halfway through the day. It’s been more of the same on Tuesday and this brings the average lenders back in line with Friday’s levels for conventional, conforming 30yr fixed rates.  That’s still much lower than Thursday, but there’s a risk of additional increases if the panic continues to subside. 
Source: Mortgage News Daily

Mortgage credit availability fell to just short of its 2012 benchmark level in February. The Mortgage Bankers Association (MBA) said its Mortgage Credit Availability Index (MCAI) dropped 3.0 percent from its January level to a reading of 100.1. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit. The index was benchmarked to 100 in March 2012. “ Mortgage credit availability decreased to its lowest level since January 2013 with all loan types seeing declines in availability over the month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The conforming subindex decreased 4.3 percent to its lowest level in the survey, which goes back to 2011. This decline was driven by the ongoing trend of shrinking industry capacity as mortgage rates stayed significantly higher than a year ago. Additionally, in this volatile rate environment and potentially weakening economy, there was also a reduction in refinance programs offered for low credit score and high-LTV borrowers.”  The MCAI has four component indices. The Conventional MCAI decreased 4.4 percent, while the Government MCAI was down 1.6 percent. The two component indices of the Conventional MCAI fell sharply, the decline in the Conforming MCAI noted by Kan and a 4.4 percent drop in the Jumbo index. The MCAI and its components are calculated using several factors related to borrower eligibility (credit score, loan type, loan-to-value ratio, etc.). These metrics and underwriting criteria for over 95 lenders/investors are combined by MBA using data made available via a proprietary product from ICE Mortgage Technology. The resulting calculations are summary measures which indicate the availability of mortgage credit at a point in time. All indices were benchmarked on March 31, 2012.
Source: Mortgage News Daily

Pi Day has come around once again, which is also, coincidentally, Albert Einstein’s birthday. As I head to Lexington for the MBA Kentucky Education Conference, led by Alan Thorup, Matt O. sent, “I have an idea: We organize a 10k race in San Jose and call it ‘The Bank Run.’” (While we’re on sports, a moment of silence for Dick Fosbury who revolutionized the high jump in the mid-1960’s). High jumpers have a soft pad to land on, not so with some bank stocks Monday. Western Alliance Bancorp, supplier of warehouse lines to many an independent mortgage banker and parent of AmeriHome, First Republic Bank, Metropolitan Bank, PacWest Bancorp, and First Horizon. Fortunately, many have “bounced” but these are all non-money-center banks seemingly causing risk to the U.S. financial system. In Banking 101 one learns that borrowing short (by holding customer deposits) to lend long (by purchasing long bonds and MBS) to improve returns is bad business. (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. Hear an Interview with AIER economist Peter C. Earle on the FOMC’s crystal ball and what to expect from future meetings.) Lender and Broker Services, Products, and Software SimpleNexus, an nCino company, kicks off its fifth annual user group conference, SNUG, today at Utah’s Snowbird ski resort, where lenders will “Level Up” with innovative mortgage technology and strategies for market success. As a special treat for those unable to attend, SimpleNexus is announcing two of its 2023 Nexus Awards winners right here and now. Arvest Bank has clinched the Captstone Award, enterprise category, for its use of SimpleNexus to bring its mission to life, and Service First Mortgage has been honored in the SMB category in recognition of its early adoption of and collaboration on eDisclosure integrations. Keep your eyes peeled on LinkedIn throughout the week for additional Nexus Award winners!
Source: Mortgage News Daily

What a difference a little systemic banking crisis makes!  Without the last 3 business days, today’s CPI data may well have tipped the scales toward a 50bp Fed rate hike next week.  As it stands, Fed Funds Futures have barely budged in response. 

That’s not to say there’s no risk today–simply that it comes from the market gradually reawakening and lowering its guard after the big flight to safety.  The more minutes that tick by without another bank failure, the more the market will get back to what it had been doing before.

Long story short: beware the bounce!  It could be fairly swift considering the motivations for the move to lower yields.
Source: Mortgage News Daily

Breaking Down the Big Move in Rates and Considering The Road Ahead

The 2nd and 3rd largest bank failures in history have happened over the past 3 days.  Markets reacted in a logical direction.  If anything, the drop in rates was made bigger by the fact that the market is searching for evidence that it’s time for the Fed to dial back its hawkish rate policies. That’s what today ended up being mostly about: the market betting on a MUCH lower rate hike profile in the coming months (and rate CUTS starting in a few short months).  Between Tuesday’s CPI data and next week’s Fed announcement we’ll have the data we need and the requisite amount of cooling-off time to have a much better sense of what the road ahead looks like.  Today’s video discusses several of the options, and much more.

Econ Data / Events

No significant econ data

Market Movement Recap

08:59 AM Supermassive bond rally overnight, led by short-term rates.  2yr down more than 50bps at times.  10yr currently down 25bps at 3.45.  MBS up just over 3/4ths of a point.

12:36 PM Strongest levels of the day at 11am and selling off a bit since then.  5.5 coupons still up 3/4ths on the day, but down half a point from highs.  10yr yield up 11bps from lows and now near highs of day at 3.524, but still down 18bps overall. 

04:07 PM MBS now up “only” 22 ticks (.69) and 10yr down “only” 16bps at 3.545.  Both are quite a bit weaker on the day, but the pace of losses has been gradual
Source: Mortgage News Daily