Morning Report: Bond yields rising on central bank comments 10/5/16

Vital Statistics:

Last Change
S&P Futures 2148.0 3.0
Eurostoxx Index 343.7 -2.0
Oil (WTI) 49.6 0.9
US dollar index 87.0 0.0
10 Year Govt Bond Yield 1.68%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.48

Stocks are higher this morning on no real news. Bonds and MBS are flat

Bonds sold off yesterday as Chicago Fed President Charles Evans said he expected a rate hike at the December FOMC meeting. Global bonds are also selling off after the ECB discussed tapering its bond purchase program in a move similar to what the Fed did. The German Bund is at -4 basis points after closing last week at -15.

We will have some Fed-speak today, with Neel Kashkari speaking at 9:30 and Jeffrey Lacker speaking at 1:00 pm.

Regardless of who wins in November, there will probably be some changes at the Fed. Donald Trump will probably pursue more wall street types (like Neel Kashkari) while Hillary will focus on diversity. There has been speculation that Janet Yellen would resign if Trump wins, but that looks like a long shot and would weaken the non-political perception of the Fed.

Bill Gross takes aim at central banks worldwide in his latest investment outlook.While central bankers are on a mission to reflate economies via low and negative interest rates, they are undermining the process via which capital gets allocated. Pension funds and insurance companies have to buy overvalued paper simply because there are no alternatives. Ultimately the financial markets exist to allocate capital to new businesses and projects based on risk and reward. Interest rates act as critical inputs into the risk and reward calculation. Central bank activity is distorting the signal that interest rates ordinarily provide, and the longer they do it, the more likely we will increase the misallocation of resources (generally known as bubbles) which will hinder the economy going forward. Exhibit (a) is Japan.

Despite the sell-off in the bond market, mortgage rates seem to be holding steady. This is par for the course, as mortgage rate movements typically lag bond market movements.

Speaking of mortgages, mortgage applications rose 2.9% last week as purchases fell 0.1% and refis increased 5%.

The ADP employment report came in weaker than expected, with 154k jobs added in September, which was less than the 170k forecast. The Street is looking for 168k jobs in Friday’s report. The big number will be wage growth.

30 Responses

  1. When interest rates are artificially low, investors chase assets that pay better or else start new businesses with greater earning potential than interest.

    On the one hand, this can lead to asset bubbles. On the other, this can lead to more money for entrepreneurs and real growth. I think the second is the great hope of western central banks.

    Like

    • Not if no one qualifies for the loans. My experience has been sure the interest rate is low, but no one can get credit. And the various new regulations are impeding the ability to properly price risk, as no one wants to be on the hook for a bad loan with the government taking an interest and viewing it as a criminal activity now.

      Like

    • The biggest problem is that you have a bubble in sovereign debt. When that blows up, pension funds and insurance companies will be even more underfunded than they already are.

      Fun fact: The Fed has 4.45 trillion in assets on about 40 billion in equity… Sporty 111x leverage ratio.. Pre-QE assets were around $700 billion I think…

      http://www.federalreserve.gov/releases/h41/current/h41.htm

      Like

  2. Congrats Troll/George: Pew says you can be scientifically literate and still not believe in climate change.

    http://www.theatlantic.com/science/archive/2016/10/republicans-can-understand-science-and-still-deny-climate-change/503003/

    Like

    • I love the cooption of language with these assholes. I tell people all the time that of course I believe in climate change.

      I know of no climate on earth that is static.

      Like

    • “The poll’s headline number is that 48 percent of Americans correctly understand the Earth to be warming due to human activity. ”

      Sufficiently indoctrinated = correct. Not that I doubt manmade pollution can and does contribute to the overall global climate, but my sense is the reality is nothing as it is depicted by the True Believer in the First Church of Global Warming.

      Like

    • I say I believe in climate change and we should do nothing about it.

      Second, for a group of people who supposedly have the “facts and science” on their side, they sure don’t act like it.

      I also find that one’s sense of alacrity on the issue is inversely proportional to the probability they passed high school algebra…

      Like

    • And the ultimate conclusion is that being a Republican makes you wrong about obvious things even if you’re smart. While only stupid Democrats are wrong, so the world should be run exclusively by smart Democrats.

      Like

    • From the link:

      The research agency found that 70 percent of Americans believe that climate scientists should have a “major role” in the country’s climate and energy policy.This is roughly like 70 percent of Americans saying they believe seismologists should have a say in the nation’s earthquake policy.

      I guess I am one of the 30% of numbskulls who wonders what possible value a climate scientist might add to a discussion about the most efficient ways to produce and distribute energy.

      BTW…the US has an “earthquake policy”? What is it?

      Like

    • The poll does nicely give the Republicans a free market message to run on though:

      “A majority of Americans, some 55 percent, believe that future technology will “solve most climate problems.”

      Liked by 1 person

  3. Victory NoVA:

    “For Young Voters, ‘Hope and Change’ Is Dead

    A group of twentysomething voters illustrates young people’s consternation with their political choices this year.

    Molly Ball 2:22 PM ET”

    http://www.theatlantic.com/politics/archive/2016/10/hope-and-change-is-dead/503180/

    Like

  4. mcwing:

    You’ll never guess who I just ran across over at The Federalist. Bilegman! He highly recommends seeing Deepwater Horizon. He was involved in the real thing, and says the movie was pretty accurate, despite some stretched relationships and sexed up explosions.

    “Hello, fellow Obama slave!”

    Like

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