Morning Report: Bond trading is becoming more like commodity trading 8/11/16

Vital Statistics:

Last Change
S&P Futures 2177.0 58.0
Eurostoxx Index 345.0 4.0
Oil (WTI) 41.6 -0.2
US dollar index 86.0 -0.2
10 Year Govt Bond Yield 1.51%
Current Coupon Fannie Mae TBA 103.8
Current Coupon Ginnie Mae TBA 105.2
30 Year Fixed Rate Mortgage 3.52

Markets are flattish this morning on no real news. Bonds and MBS are flat as well.

Slow news day (again)

Initial Jobless claims dipped ever so slightly to 266k last week.

Import prices rose 0.1% month-over-month, but are down 3.7% on an annual basis. Inflation remains in a deep freeze.

Housing has historically been the vehicle people use to build wealth. For most people, it is their biggest assets. Home prices have been rising since bottoming in 2012, but aspiring homeowners have been shut out as the homeownership rate hits levels not seen since the 1970s. For young Millennials with student loan debt and difficult job prospects, home price increases have made the dream of homeownership further out of reach. Meanwhile, rental inflation (driven by the same scarcity issues that are driving home price appreciation) mean that rent accounts for a bigger and bigger percentage of disposable income.

The homeownership rate fell to 62.9% in the second quarter, which is a 51 year low. You can see the big jump in homeownership that started in the mid 90s has been reversed. That jump in homeownership was a function of Bill Clinton’s social engineering via the housing market and the development of a securitization market. Tight credit post-financial crisis remains an issue as well, as the US taxpayer bears the credit risk for 90% of all origination. If a loan doesn’t fit into the government / conforming box, it likely isn’t getting done.

Homeownership Rate BBG

That said, this does represent pent-up demand that will be unleashed at some point, and with housing starts still well below historical averages, could provide a massive boost to the economy once it turns around. Don’t forget the Millennial generation is bigger than the baby boomers. Amidst the gloom however, is evidence that the Millennials are finally buying.

Interesting observation, and spot-on: Negative interest rates have made bond investing similar to commodity investing. As Warren Buffett would say that with commodities you are simply betting on what someone else might pay for them at some future moment. Commodities cost money to hold (because storage isn’t free) and now bonds with negative yields exhibit the same characteristics. The only way to make money in bonds has been to find a greater fool to sell to. If this causes volatility to spike (which in theory it should), then that will have major effects on mortgage rates and pipeline hedging.

7 Responses

  1. I am 73 today.


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