Morning Report: You have to pay to lend money to Portugal

Vital Statistics:


  Last Change
S&P futures 3653 -19.6
Oil (WTI) 46.43 0.94
10 year government bond yield   0.92%
30 year fixed rate mortgage   2.80%

Stocks are down as stimulus negotiations stall. Bonds and MBS are up.


Initial Jobless Claims rose to 853,000 last week. Meanwhile job openings increased to 6.52 million.


Inflation at the consumer level remains under control. The Consumer Price Index rose 0.2% month-over-month and 1.2% year-over-year. If you strip out food and energy prices, it rose 0.2% MOM and 1.6% YOY.


Homeowner equity rose 10.8% in the third quarter, which was the highest gain since 2014. Overall equity rose by $1 trillion, which works out to be about $17,000 on average for each homeowner. The average home with a mortgage had $194,000 in equity. The increase in home prices has been a huge boost to an otherwise difficult economy.


Lawmakers are looking at including an eviction moratorium until February 2021. This would only apply to people earning less than 50% of their area’s median income, so we would be talking about people making in the $30k and below range.


Remember the PIIGS crisis from about 8 – 10 years ago? The PIIGS was an acronym for the struggling European economies of Portugal, Italy, Ireland, Greece, and Spain. These countries had severe economic problems, which drove up the funding costs. Greece actually defaulted on its debt in 2015. Fast forward to today. The Portuguese 10 year is trading with a negative yield. Yes, if you want to lend money to the Portuguese government, you have to pay them. Spanish 10 year bonds yield 2 basis points. Italy and Greek yields are lower than the US 10 year. Let’s not forget that the Greek 10 year yielded 35% 5 years ago.

We are truly in the midst of a government-created experiment in direct market intervention like the world has never seen before. Global central banks have manipulated interest rates to the point where the signal-to-noise ratio is close to zero. Academics are setting the price of money the way Soviet bureaucrats set quotas for the Volograd Tractor Plant. There is zero market-driven influence on risk-free interest rates in the world right now.

If these rates were market-driven it would mean the market is telling you that we will experience a global deflationary wave, similar to what Japan has experienced for the last 30 years.

The planet’s collective bond markets are at a party. Germany and Japan are passed out in the corner. Spain and Portugal are puking in the bathroom, and the US and the UK are still staggering at beer pong table. But hey, they are the most sober ones there.

What does this mean for investors? No idea, since this is completely unprecedented. In the short term, I cannot see how US bond yields manage to escape the global vortex pulling down rates. While it is hard to argue that US rates will go negative, I think that the path of least resistance for rates in the US is down, even after the economy recovers. In other words, the mortgage business should continue to experience a refi boom.

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