Morning Report: Short Treasury bets blew up last week

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down after last week’s furious rally.

Supposedly macro hedge funds were heavily short Treasuries last week, and that trade blew up spectacularly. This begs the question whether last week’s rally was just a technical even that will be erased or the end of the Treasury bear market for this cycle. The jobs report shows the employment market is catching up to all of the other data points like the ISM, consumer confidence, etc.

The Fed has just done one of the most dramatic tightenings in history, and I think the possibility of a “no-landing” scenario is highly unlikely. The US had unprecedented fiscal stimulus from 2020-2022, which is probably helped delay the recession, which is why people are thinking this time is different. It probably isn’t. Note that there is a Fed model that finds the economy generally ends up in a recession when the unemployment rate rises 50 basis points off of its low. We’re not there yet, but we are close.

The week ahead is data-light, although we will have a lot of Fed speakers, including Jerome Powell on Tuesday and Wednesday. The only data release of any importance will be Consumer Sentiment on Friday where we will get inflationary expectations.

Mortgage Capital Trading, Inc. (MCT®), a leading mortgage hedge advisory and secondary marketing software firm, reported today a drop of 17.76% in mortgage lock volume over the prior month. Loan originations for October continued to dip as mortgage rates hovered around 8% and lack of housing supply continues to slow origination volume. While overall mortgage lock volume dropped more than 17% in October, cash out refinances did see a boost. “Cash out refinances jumped more than 11% in October from the previous month,” said Andrew Rhodes, Senior Director, Head of Trading at MCT. “However, given that cash out refinances are already at notable lows, I don’t believe it to be statistically significant.”

Home sellers are cutting their prices in order to move the merchandise, according to the latest from Redfin. Nearly 7% of for-sale homes registered a price drop in October, a record. “Some sellers are pricing too high because they have FOMO after their neighbor’s house sold well over asking price two years ago,” said Seattle Redfin Premier agent Patrick Beringer. “While low inventory is driving some competition and relatively affordable homes in popular neighborhoods are still selling fast, they’re getting two or three offers as opposed to 20 offers at the height of the market. With mortgage rates in the 7.5% to 8% range, buyers simply don’t have the budget they would have had two years ago or even one year ago.”

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