All Things in Moderation

Vital Statistics:

Stocks are flattish as trade progress was offset by weakness in overseas economies. Bonds and MBS are up.

Global bond yields are falling this morning after a dismal ISM manufacturing reading for Germany. The Bund is down 5.5 basis points to negative 57 bps, which is pulling down US Treasury yields. We have a big week of data, with home prices tomorrow, new home sales on Wednesday, GDP on Thursday, and Personal Incomes / Spending on Friday. We will also have Fed-speak every day except Tuesday.

The NY Fed addd $50 billion in cash to the markets this morning to ease pressure in the overnight repo markets. A shortage of cash last week pushed overnight repo rates to 10% last week. Mortgage Backed security repo rates spiked last week along with Treasuries, but MBS are now back to normal levels. A rise in MBS repo rates can make leveraged bets in MBS more expensive (this really affects mortgage REITs) and will therefore make them require a higher return, which means higher mortgage rates, at least at the margin.

Note that Fannie Mae has also reportedly backed off its pricing last week, especially at the higher note rates in response to pressure from regulators. These changes went into effect on Thursday. Reportedly, the increase was in the 25 basis point range on average, but it was lower at the 3% note rates and up to 50 basis points higher up in the stack. From the chatter I am hearing Freddie adjusted as well, but not as dramatically. What does this mean? Pricing for investment properties will be hit hard, and borrowers are not getting paid much to buy up the rate.

The MBA made its recommendations to the CFPB over how to best deal with the GSE patch. The MBA recommends that the CFPB scrap the 43% debt to income ratio standard and pursue a more holistic method of determining a borrower’s ability to pay. The MBA lays out a number of recommendations for how to de-emphasize the importance of DTI. The GSE patch is set to expire in January 2021.

The Chicago Fed National Activity Index showed an uptick in activity during August. Production-related indices drove the increase, while employment-related indicators were flat. Many traders who were making recessionary bets (short stocks / long bonds) earlier in the summer (based on trade fears) found themselves on the wrong side of the boat this month. The S&P 500 is flirting with all-time highs, and the 10 year bond yield backed up nearly 30 basis points since the start of the month. The CBOE volatility index (VIX) has fallen from 25 in early August to around 15, which is historically a benign level.

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