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Morning Report: Bond yields continue to fall


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Stocks are marginally higher as conflict continues in Israel. Bonds and MBS are up. We have 3 Fed speakers this afternoon and also will get the FOMC minutes at 2:00 pm.

Inflation at the wholesale level rose higher than expected, with the Producer Price Index rising 0.5% month-over-month and 2.2% year-over-year. This primarily reflects rising commodity prices, particularly energy. Approximately 40% of the increase was attributed to gasoline.

Mortgage Applications rose 0.6% last week despite a spike in bond yields. Purchases rose 1% while refis rose 0.3%. Purchases are down about 19% YOY while refis are down 9%. “While most mortgage rates increased last week, rates on ARMs declined, leading to an increase in ARM volume and an increase in overall applications. The level of ARM applications increased by 15 percent over the week, bringing the ARM share up to 9.2 percent of all applications, the highest since November 2022. The yield curve has become less inverted in recent weeks and ARM pricing has certainly improved,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed mortgage rate is at 7.67 percent – the highest level since 2000 and 40 basis points higher than a month ago. Application activity remains depressed and close to multi-decade lows, with purchase applications still almost 20 percent behind last year’s pace. Refinance applications also continue to be limited, and the average loan size has fallen to its lowest level since 2017.”  

Bank of America has called the current US bond bear market the worst of all time. The peak-to-trough losses in the 30 year bond is about 50%. This is worse than the bond bear market of the early 80s when Treasuries were called “certificates of confiscation.” Hedge Funds continue to add to their short position in Treasuries and has now reached the largest short position in history.

ING is saying the capitulation trade was last week: “The bond bear market bubble has burst, at least for now,” ING said. “Two reasons for this are 1) lower US hike risk, and 2) the elevation in geopolitical tension.”

Minneapolis Fed President Neel Kashkari discussed the big increase in long term bond yields and commented on what it means for monetary policy. “It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down,” Kashkari said Tuesday during a town hall event hosted by Minot State University. “But if those higher long-term yields are higher because their expectations about what we’re going to do has changed, then we might actually need to follow through on their expectations in order to maintain those yields,” he added. He did say the move was “perplexing” and said he wasn’t sure whether it was due to market optimism over the economy, or a change in market expectations regarding future monetary policy.

Several Fed Presidents have mentioned that the abrupt rise in bond yields over the past month is acting like a tightening and may allow the FOMC to avoid another rate hike this year. The November Fed Funds futures only see a 13% chance of a hike in November and a 28% chance of a hike by December. A month ago it was a 50-50 chance of a November hike.

I have to imagine that there is concern about the banks and another Silicon Valley Bank situation emerging. We are already seeing editorials in bank trade journals advocating for a TARP 2.0 to allow banks to borrow money at sub-market rates secured with underwater Treasuries and MBS.

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Lenders are already preparing for higher loan limits in 2024. Guaranteed Rate and Rocket are allowing files up to $750k.

Fannie Mae is now allowing multi-family borrowers to go to a 95 LTV on 2-4 unit properties. This is an increase from 85% on 2-units and 75% on 3-4 units. Casefiles submitted after 11/18/23 will be eligible.

Construction wage growth is slowing, according to the NAHB. It is likely the construction market peaked last year and is now adjusting to higher interest rates.

MBA: Mortgage Applications Increased in Weekly Survey

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