Morning Report: Bond Vigilantes returning? 2/12/18

Vital Statistics:

Last Change
S&P Futures 2648.5 29.8
Eurostoxx Index 373.8 5.1
Oil (WTI) 60.3 1.1
US dollar index 84.2 0.0
10 Year Govt Bond Yield 2.87%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.37

Stocks are soaring this morning on overseas strength. Bonds and MBS are down.

No economic news today. The only market moving data this week should be the Consumer Price Index on Wednesday and the Producer Price Index on Thursday. We will get some housing data, with starts and the FHFA House Price Index, although those should not matter to the markets. Bonds are probably going to be an inverse stock ETF for a while – meaning that when stocks are down, they will be up and vice versa.

Old timers may remember the term “bond vigilantes” from the early days of the Clinton Administration. Early on in Bill’s term he wanted to do a fiscal stimulus package which would have increased government spending. As he talked about increasing spending to goose the economy, the bond market would sell off in response, raising interest rates. In other words, the government’s plan to increase economic growth via government spending was being offset by the market (increasing rates are generally bad for the economy). At one point, Bill Clinton was so exasperated, he exclaimed: “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f****** bond traders?” James Carville, Bill’s strategist once said ““I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Fast forward to today. With the spending deal in place, along with a possible infrastructure plan, the economy will be getting plenty of stimulus and government spending. The bond market has been artificially supported by the Fed and global central banks, and that is unwinding. The bond vigilantes may be coming back, which is ironic since probably 3/4 of the bond traders on the street are experiencing their first tightening cycle. But, the trader in me sees the path of least resistance in the bond market as down, which means that rates are generally heading up. In practical terms, this means floating is a lot riskier than it used to be. During the last 30 years, rates generally moved down over time, so if you floated you often did well on that trade – you weren’t paying for a lock, and your rate at closing was probably better than it was when you opened the file. Given the change in market direction, the risk of floating is that the rate will increase over time, and in that circumstance it might make better sense to lock. Note that this isn’t a forecast of the bond market over the next 45 or 60 days, but an observation that the market “feels” like it wants to go down. It is something to keep in the back of your mind when discussing a lock with a borrower.

The House tweaked some of the “points and fees” language in Reg Z last week. Democrats have been universally opposed to the Financial CHOICE act, which makes some changes to Dodd-Frank. This may have a chance in the Senate, or at least a better chance than CHOICE would.

Best headline from last week: Low volatility ETN dies of irony. This was in reference to the XIV inverse VIX ETN which blew up early last week.

10 Responses

  1. The perpetual guilt of the woke millennial.

    “Yes, I Will Let Amazon Deliver My Whole Foods Produce Even Though I Know It’s Bad for the Country

    By Jordan Weissmann
    Feb 09, 20189:30 AM”

    The horror:

    “And it’s not hard to imagine that combining better affordability with painless, free delivery could turn the chain into a much more dominant player that could end up putting a lot of unionized (or at least higher paying) grocery chains in dire straits. “

    Liked by 1 person

    • Grocery retailing is about the lousiest business on the planet, aside from airlines and oil refining… The margins are miniscule.

      Bezos may be able to compete on convenience, but he isn’t going to be able to compete on price. This fear that Bezos is going to drive all the other supermarkets out of business is probably misplaced…

      Liked by 1 person

      • This is the fear, along with the guilt of being complicit in it:

        “Maybe I’ll be contributing to the slow ossification of the American economy. But it’s still better than getting ripped off at the co-op.”

        They know all their other woke friends will secretly be judging them for getting the deliveries vs supporting the co-ops and bodegas.

        Liked by 1 person

  2. Economist weighs in on prudent Fed Reserve policy for Powell’s eyes:

    It read as reasonable to me. Brent?


    • I think so…FWIW, the Fed would be delighted to see higher inflation – it gives them the leeway to keep moving from the zero bound and back to some semblance of normalcy.. Plus, the further away they move, the more tools they will have to support the economy the next time we have a recession.

      We are in a situation where the federal government is pursuing an expansionary fiscal policy and the Fed is pursuing a contractionary one (or at least heading in a contractionary direction). While monetary policy is still very easy overall, the directional change will have an effect on the economy. Don’t forget, once they get monetary policy to normalcy (maybe 3% or so on the Fed Funds rate) they still have a $4.5 trillion balance sheet to deal with. The last time we had expansionary fiscal policy and contractionary monetary policy was the early 80s.

      Until we start seeing strong wage growth, I don’t think we have to worry about inflation. And I don’t think we will see strong wage growth until that untapped reservoir of workers who left the labor force during the Great Recession re-enter the labor force (some will retire, but most cannot afford to).

      Liked by 1 person

  3. Two big reasons for Obama’s victories were very high black voter turnout and low(ish) white working class turnout.

    Does Gillibrand inspire blacks like Obama? Does her positions on the NRA and immigration help keep the white working class at home?

    I’m guessing she thinks she has to be to the left of Elizabeth Warren and Kemala Harris here. I don’t think it’s gonna work. I think she’s actually running to be the VP of a male nominee.

    Liked by 1 person

  4. This is funny:

    Liked by 1 person

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