Morning Report: Trade Detente?

Posted on January 18, 2019 by Brent Nyitray

Vital Statistics:

 

Last Change
S&P futures 2646.5 11.25
Eurostoxx index 355.63 4.9
Oil (WTI) 52.63 0.58
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.48%

 

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

 

Stocks got a lift yesterday around 2:30 when the Wall Street Journal reported that the US was considering lifting tariffs on China in order to secure a trade deal. Stocks shot up on the news while the 10 year bond yield rose to 2.75%. We didn’t see much movement in MBS (FWIW, I don’t think I saw any reprices), but the weakness in bonds is continuing this morning. The Trump Administration did say that nothing has been decided and nothing is imminent. Treasury Secretary Steve Mnuchin is in favor of trade detente, while U.S. Trade Representative Robert Lighthizer is more hawkish.

 

Initial Jobless Claims fell to 213,000 last week as expected seasonal layoffs failed to materialize.

 

The new FHFA Director Mark Calabria has more of a libertarian bent than his predecessor, Mel Watt. For instance, he is skeptical of the whole originate to securitize model, which introduces more risk into the system in his view. He also doesn’t support the subsidies that make things like the 30 year fixed rate mortgage possible. For those that don’t know, the US residential real estate financing system is unique, with all sorts of subsidies to borrowers. 30 year fixed rate mortgages are unheard of overseas, with most mortgages being adjustable rate. Second, overseas banks “eat their own cooking” – in other words, they hold and service the loans they make. That is generally not the case in the US – most loans are securitized and sold to pension funds, sovereign wealth funds, etc. In other words, the borrower bears the interest rate risk and the bank bears the credit risk. In the US, the investor bears the interest rate risk while the taxpayer bears the credit risk.

 

Calabria comes in when the government / GSE system is pretty much the only game in town. Even Obama’s FHFA wanted to see the private sector take on a bigger role in mortgage finance, however the simple fact is that it hasn’t really stepped up yet. There are many reasons for this that I discussed here that are independent of policy levers. Given that reality, the chance that anything changes much in the mortgage space is pretty remote.

 

 

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