Morning Report: Volatility and mortgage rates 1/9/18

Vital Statistics:

Last Change
S&P Futures 2751.3 4.5
Eurostoxx Index 400.3 1.9
Oil (WTI) 62.0 0.2
US dollar index 86.0 0.1
10 Year Govt Bond Yield 2.50%
Current Coupon Fannie Mae TBA 102.313
Current Coupon Ginnie Mae TBA 103.063
30 Year Fixed Rate Mortgage 3.92

Stocks are higher this morning on good economic data out of Europe. Bonds and MBS are down.

Small Business Optimism slipped slightly in December, capping the strongest year in the index since the early 80s. Hiring was sluggish in December, with a lack of qualified workers being the biggest problem in construction and manufacturing. Compensation is trending up as well, as a net 23% of small businesses intend to raise compensation this year.

Job openings were little changed in November, according to the JOLTs survey. This was a slight drop from October, and a touch below expectations. Openings increased for retail, and fell for government, transportation, and utilities. The quits rate was unchanged at 2.2%. Until we start seeing the quits rate move up, we probably won’t be seeing broad-based wage inflation.

Volatility in the bond market has hit a 52 year low, according to a Bank of America / Merrill Lynch report. This is not surprising: volatility in the stock market is also at record lows. Volatility is generally a sign of stress in the system, and it tends to fall during periods of stronger growth.

The drop in bond market volatility has major implications for the mortgage market as well, and helps explain a bit of why mortgage rates are behaving the way they are. While the 10 year has been steadily moving higher over the past few months, mortgage rates have been relatively stable. While mortgage rates do tend to lag Treasuries, something else has been going on, and that something has been low volatility.

30 year fixed rate mortgages have an embedded option in them, which is the right of the borrower to prepay their mortgage without penalty at any time. That right to prepay is worth something, and that value explains the yield differential between government backed mortgage debt and Treasuries. The value of the prepayment option is determined largely by the volatility of the bond market – when volatility rises, the right to prepay is worth more, and when volatility falls, it is worth less. So, when the market is stable, investors bid up mortgage backed securities as the value of that option falls, which translates into tighter MBS spreads and lower mortgage rates. In fact, the difference between a 30 year fixed rate mortgage and an adjustable rate mortgage is driven by the value of that prepayment option and risk-shifting between borrower and lender. When volatility is low, the borrower is paying less for that option and 30 year fixed rate mortgages will be more attractive than ARMS. When volatility is high, ARMS will be much cheaper. During periods of low volatility, it makes sense to scoop up that prepay option on the cheap and take out a 30 year fixed rate mortgage. When volatility is high, you will end up getting a much lower initial rate with the ARM. Co-incidentally, the economic backdrop (stronger growth, accelerating inflation, and a Fed raising short term rates) also favors the 30 year fixed over ARMS.

32 Responses

  1. What nominating Oprah will look like for the political discourse.

    It will complete the death of the paradigm of debating around objective facts that Trump has done so much to advance.


    • Then she definitely fails Brent’s next-president-is-a-reversal test.

      But I feel like this has been going on for years now. Trump’s just a parody of the dismissal of objective facts that has dominated politics and public discourse . . . well, forever. There’s not enough people challenging them on it, there’s not enough people emphasizing facts and data in the public square. Not sure that will change. A dispassionate dive into the factual weeds is not a big ratings grabber.


      • Just watch “your truth” is going to be to the left what “fake news” is to the right.

        Any attempt to challenge it with actual facts will be attacked as racist, sexist, and blaming the victim. Saying that their facts are wrong will be tantamount to attacking their identity.


        • I’m pretty sure you’re right. But then again, maybe that’s just your truth. My truth may be different.

          “You don’t get to have your own facts! I get to have my own facts, but you don’t get to have your own facts!”


        • jnc:

          Any attempt to challenge it with actual facts will be attacked as racist, sexist, and blaming the victim. Saying that their facts are wrong will be tantamount to attacking their identity.

          That has been happening for quite some time already. It wasn’t Oprah who introduced the notion of “your truth”.


        • True, but up until now I haven’t really seen it embraced by a Democratic presidential candidate. They’ve paid lip service to the premise of objective facts and love to trot out the Moynihan quote about being entitled to your own opinions, not your own facts.

          Oprah will usher in New Age BS to the main debates.

          Liked by 1 person

        • Politicians, generally, do not traffic in facts or data. They are management. Details are for the front line.

          … who are mostly true believers who also don’t piffle in testing “facts”. They already know, no need to confirm!


  2. Worth a read on Bundy:

    “The prosecution apparently let its loyalty to the FBI override its obligations to due process, and it got caught.”

    Liked by 1 person

  3. Amazon is the new Walmart for progressives:

    “Amazon Is Thriving Thanks to Taxpayer Dollars
    The tech giant has received more than $1 billion in tax breaks. The government is also funding food stamps for many of its workers.

    By David Dayen
    January 9, 2018”


    • Isn’t Wal-Mart still Wal-Mart for progressives? Although I think maybe Wal-Mart is solving the problem by laying people off, as sometimes the stores don’t seem to have very many people working at them.

      Bezos owns WaPo. I don’t think that’s an accident. Good luck, New Republic.


  4. Interesting observation on the evolution of Red/Blue:

    “But the larger danger is that the idea of disunion, within states and generally throughout the country, has now become not only a viable topic of political discussion, but also a viable political strategy. The whole blue-red thing used to be an easy way to distinguish on television which geographical area voted for what candidate. Then, it became shorthand for all manner of political differences. It was inexact and shallow, but inexact and shallow people found it convenient, so everybody went along with it. Now, though, those divisions are driving policy in a way that they rarely have in the past, and when they have, the policies generally resulted in ghastly consequences.”

    Liked by 1 person

    • how do we spin 4% growth as a bad thing?

      /Washington press corps


    • People have no idea how much pent-up demand there is from the obama years…. If we get a construction boom, you are looking at 4% GDP easy….

      Now can we get Millennials who have a degree in critical theory and are working as baristas to swing a hammer?

      Edit: and the black swan for this is….. Japan recovering… The world’s second biggest economy has been in a deep freeze since Nirvana ruled the charts… That changes the global economy is a big way.

      Liked by 1 person

  5. Good human interest story:

    “A Tribute to My Improbable Tea Party Friend
    Our unlikely bond only grew stronger when we were both diagnosed with cancer this spring.

    Stephanie Mencimer
    Dec. 25, 2017 6:00 AM”


  6. I was told this is impossible, that Trump does everything but drool in public and play with his own shit because dude’s batshit crazy.


  7. This strikes me as significant:

    ““My understanding was that they believed Chris at this point — that they believed Chris might be credible because they had other intelligence that indicated the same thing and one of those pieces of intelligence was a human source from inside the Trump organization,” Simpson said. Simpson added that his understanding was the source was someone who had volunteered information to the FBI or, in his words, “someone like us who decided to pick up the phone and report something.””

    Assuming it’s not the same guy who was bragging to the Australian diplomats.

    Liked by 1 person

  8. A real man would bang a tranny.

    I know I have.


  9. Good thread on last nights DACA decision.


Be kind, show respect, and all will be right with the world.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: