Morning Report – Bond Market Volatility 6/4/15

Stocks are lower this morning as talks in Greece stall. They have a big payment due to the IMF tomorrow.

Some labor market numbers this morning. Initial Jobless Claims fell to 276,000, a great number. That said, the final revision to productivity for the first quarter is in, and it fell to -3.1%. Unit Labor Costs rose 6.7%.

The IMF is urging the Fed to hold off raising rates until the first half of 2016. They also cut their forecast for US GDP growth from 3.1% to 2.5%, more or less matching what the Fed was forecasting at its March meeting. Given the weak Q1, that forecast is probably coming down in the June FOMC meeting.

If you have been caught by surprise with the big moves in the bond market, you aren’t alone. The volatility in the bond market has been stunning over the past several months. The mood of the markets seems to go from fear of deflation in Europe to fears of inflation in the US. Jim Bianco characterized the bond market like this: “You want to shove rates down to zero, people are going to make big bets because they don’t think it can last,” Bianco said. “Every move becomes a massive short squeeze or an epic collapse — which is what we seem to be in the middle of right now.” IMO, the action in the markets is also a function of the fact that the major players in the markets right now are central banks, and they are taking positions based on social policy considerations, not economic ones. In other words, the ECB isn’t buying bonds because it thinks they are cheap – it is buying them in an attempt to create inflation. When you have non-economic players (players that are not concerned about their p/l) dominating the market, the ones that do care about their p/l (everyone else) are bound to get whipsawed.

Another issue is the fact that new regulations against proprietary trading has diminished the historical market stabilization role of trading desks. In the old days, when a big buyer or seller (say someone like a PIMCO) had an big order, they would find an investment bank to take the other side of the trade. The bank would bid (or offer) a little bit above or below the market and gradually work out of the trade over the course of the day or days. This had the effect of dampening volatility as it kept the market from getting whipsawed by big orders. Ironically, the regulatory push to “make banking boring again” has had the effect of making the government bond market anything but boring.

For mortgage bankers, the thing to keep in mind is that mortgage rates have been “fading” this volatility. In other words, they have been reluctant to follow big outsized moves. You can see it in the graph below, where the upper line is the Bankrate 30 year mortgage rate and the lower line is the US 10 year bond yield. Note how mortgage rates ignored the big dip in yields at the end of Janurary and have lagged the moves upward lately. Think about this when you are locking. If rates stop going up, mortgage rates will still probably keep rising to “catch up” with Treasuries. Even if rates fall, mortgage rates will probably stay up here for a while.  In a volatile market like this it doesn’t make a lot of sense to be floating. Rates are still at historical lows, and can move up in a hurry. It would be shame to end up paying an extra 30 basis points on your mortgage because you were waiting to catch a rally that never came.

25 Responses

  1. Or NoVA they will outlaw the sale of parts.


  2. i’m sure they won’t ever give up.


  3. Bummer.


    • A study psychoanalyzes libertarians and determines they don’t love their families as much as non-libertarians. (page 158 last paragraph)

      Click to access WHR15-Apr29-update.pdf

      The powerful study by Iyer et al.20 of American libertarians, within Haidt’s analytical framework, exemplifies this line of research. Using online survey data, Iyer, Haidt and associates describe the distinctive moral and affective eliefs of American libertarians. The argument, at the core, is that libertarians (who generally oppose government redistribution of income and public investments) have distinctive personality traits including low levels of empathetic concern; low extraversion and agreeableness; low emotional reactance to others; and weaker feelings of love towards family, friends, and generic others. The result is a high degree of individualism that is then “moralized” into a moral code that puts personal liberty ahead of other moral standards such as compassion for others.

      It is quite amazing to see how utterly stupid and simpleminded otherwise educated people can be.


  4. Those that disagree with me are either stupid or evil or both.


    • McWing;

      Those that disagree with me are either stupid or evil or both.

      Or, it seems, are psychologically imbalanced.


  5. It’s the only possible answer!


  6. Now you guys are getting it!


  7. “It is quite amazing to see how utterly stupid and simpleminded otherwise educated people can be.”

    It’s intentional dishonesty. Don’t assume it’s a good faith argument.


    • jnc:

      It’s intentional dishonesty. Don’t assume it’s a good faith argument.

      I wonder. I think it is entirely possible that these people really do believe this nonsense, and are simply incapable of considering or understanding why it might be wrong. They are like religious zealots.


  8. Another example of prosecutorial overreach:

    “Federal prosecutors charged Matanov for destroying records under the Sarbanes-Oxley Act, a law enacted by Congress in the wake of the Enron scandal. The law was, in part, intended to prohibit corporations under federal investigation from shredding incriminating documents. But since Sarbanes-Oxley was passed in 2002 federal prosecutors have applied the law to a wider range of activities. A police officer in Colorado who falsified a report to cover up a brutality case was convicted under the act, as was a woman in Illinois who destroyed her boyfriend’s child pornography.

    Prosecutors are able to apply the law broadly because they do not have to show that the person deleting evidence knew there was an investigation underway.”


  9. It’s intentional dishonesty. Don’t assume it’s a good faith argument.

    Now who’s being naive Kay?


  10. Good Op-Ed in the NYT by Edward Snowden:

    “Edward Snowden: The World Says No to Surveillance

    JUNE 4, 2015”


    • jnc (from Snowden):

      …the right to privacy — the foundation of the freedoms enshrined in the United States Bill of Rights…

      I’m not a defender of the surveillance state, but the above is just plain wrong.


      • jnc (from Snowden):

        As a society, we rediscover that the value of a right is not in what it hides, but in what it protects.

        What does this mean?


      • With each court victory, with every change in the law, we demonstrate facts are more convincing than fear.

        I’m not entirely sure what he is saying here, either, but whatever it is he is probably wrong. If the nation has become less tolerant of government surveillance than it was immediately post 9/11, it is almost certainly because fear has subsided, not because of “facts” (whatever that means). If the US suffered another attack equivalent to 9/11, support for more government surveillance would surely increase significantly, just as it did post 9/11.


  11. The last I believe is a reference to the general arguments made by supporters of the Patriot act that any roll back of it’s provisions will make the US more vulnerable to a future terrorist attack.


    • Populism makes people stupid, including Rick Perry.

      So, asked CBS’s John Dickerson, what’s the answer to oversized, privileged Wall Street banks? “Regulate them,” Perry said. Especially in a way that will ensure they can’t receive future bailouts: “If they make bad decisions, let them live with them,” Perry said.

      The way to make people/institutions live with bad decisions is to stop regulating them and, well, let them live with the consequences of their decisions. And you don’t need to regulate anyone in order to ensure they won’t receive bailouts. Indeed regulation can’t ensure such a thing. The only thing that can ensure the absence of bailouts is the willpower of politicians not to bail anyone out. This is so obvious and simple, it doesn’t speak well of the electorate that this kind of electoral rhetoric actually tends to work.


  12. I still don’t understand why financial institutions are regulated at all.


    • McWing:

      I still don’t understand why financial institutions are regulated at all.

      Because politicians and unelected bureaucrats are obviously so much more virtuous than the banksters that populate the orgnanized crime syndicate known as the financial services industry.


  13. If a hedge fund almost blew up the financial industry in the mid 90s, ending TBTF is a fool’s errand.

    How much of the fallout from the financial crisis was due to Fannie Mae and AIG, both of whom were outside of the banking regulatory sphere?


  14. But weren’t both under differently regulatory spheres? Insurance and mortgage? Also, Fannie Mae was selling MBS’s, a financial instrument?

    Thank god for all that regulatin’! Dodged a bullet, AmIRight?


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