Morning Report: Bond yields approach their 2013 lows 4/5/16

Markets are lower for the second day in a row on global growth concerns. Bonds and MBS are up.

With the latest bond market rally, the 10 year bond yield is a stone’s throw away from the 2013 “taper tantrum” when the Fed began its withdrawal of QE. Part of the reason for the bond rally is the flight to safety in Europe. The German Bund now yields under 10 basis points. Talk about a all-risk/no reward trade. Falling global bond yields are pulling US Treasury yields lower as investors sell European and Japanese bonds to buy US Treasuries. For the mortgage industry, it should mean more refi volume. Since the Fed hiked rates in December, the 10 year yield has fallen 58 basis points. Who’d a thunk?


The ISM non-manufacturing index improved in March, after decelerating for most of last year and this year. Employment continues to be neutral.

Job openings fell in February to 5.445 million from 5.6 million the month before. These are still boom-time levels, which begs the question as to why the labor market continues to have such a low labor force participation rate. Many would argue it is a skills gap – the labor people need isn’t what is out there there right now.

Good article on how hard it can be for Millennials to get a mortgage these days if you have bad credit, given the regulatory shelling that has been going on for the past 8 years. There is definitely a cognitive dissonance in DC over the competing goals of increasing access to credit and slugging “unregulated” financial system even harder.

Ever wonder why a government guaranteed mortgage backed security trades for a much higher yield than the corresponding Treasury? The credit risk is the same – i.e. zero – so what is the reason for the difference. I discuss the reason in Rob Chrisman’s blog. Note there is some bond geek math going on in the explanation.

Former Fed Head Narayana Kochlerakota discusses the way we use the financial system for social engineering, and suggests if the government thinks college and housing needs to be subsidized, the answer is to subsidize it directly instead of subsidizing borrowing. FWIW, I have always thought the issue with college tuition inflation is that college is a good with inelastic demand. Colleges don’t compete on price and parents will pretty much pay whatever is asked. When the government subsidizes an inelastic good, the subsidies accrue to the producer, not the consumer. Which means the net effect is that the more the government subsidizes college education, the more colleges raise tuition.

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