All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,339	4.8
Oil (WTI)	73.81	0.45
10 year government bond yield		1.31%
30 year fixed rate mortgage		3.11%

Stocks are higher this morning as we await the FOMC minutes at 2:00 pm this afternoon. Bonds and MBS are up.

It looks like the big decrease in yields is an across-the-board phenomenon in global sovereign debt markets which started on Monday when US markets were closed. The German Bund has dropped 10 basis points in yield to -30 bp, and Gilts / JGBs are up as well. The drop in yields doesn’t appear to be driven by, say the jobs report.

One possibility is that investors are thinking that the post-COVID recovery has peaked, and that inventory re-stocking is wrapping up which means that any commodity-driven inflation has peaked. Commodity-driven inflation is almost always transitory (the exception being the oil shocks of the 1970s), and a durable increase in inflation requires higher wages combined with low productivity.

MBS are lagging the move in Treasuries as usual.

The number of mortgages in forbearance fell to 2 million, which is the lowest since March 2020 at the onset of COVID. The percentage fell to 3.87%. “For the first time since last March, the share of Fannie Mae and Freddie Mac loans in forbearance dropped below 2 percent. The share in every investor type and almost every loan category dropped as well, bringing the number of homeowners in forbearance below 2 million,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The rate of forbearance exits and new forbearance requests remained at low levels, but we expect the pace of exits to increase with reporting next week for the beginning of July.”

Mortgage applications fell 1.8% last week as purchases fell 1% and refis fell 2%. “Even as mortgage rates declined, with the 30-year fixed rate dropping 5 basis points to 3.15 percent, both purchase and refinance applications decreased,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Treasury yields have been volatile despite mostly positive economic news, including last week’s June jobs report, which showed ongoing improvements in the labor market. However, rates continued to move lower – especially late in the week. The 30-year fixed rate was 11 basis points lower than the same week a year ago, but many borrowers previously refinanced at even lower rates. Refinance applications have trended lower than 2020 levels for the past four months.”

The Fannie Mae Home Purchase Sentiment Index was largely unchanged last month, however the some of the components are beginning to reflect the current housing market. The percentage of people who think it is a bad time to buy increased by 8 ppts to 64%, while the number of people who think it is a good time to sell increased by 10 ppts to 77%.

There were 9.2 million job openings at the end of May, according to the JOLTS jobs report. Interestingly, the quits rate fell from 2.8% in April to 2.5% in May. Since the quits rate tends to lead wage inflation, the drop in that statistic could be considered bond-bullish. The labor market continues to be a mess of conflicting signals.

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