Morning Report: Fed Day

Vital Statistics:

 LastChange
S&P futures4,29339.2
Oil (WTI)98.502.59
10 year government bond yield 2.17%
30 year fixed rate mortgage 4.46%

Stocks are higher this morning as Chinese markets rallied in the wake of the government’s decision to support markets. Bonds and MBS are down again.

The Fed’s decision will come out at 2:00 pm, and the press conference will start at 2:30. This decision will carry more weight than the usual Fed decision, as market participants will be looking closely at the dot plot and the updated economic forecasts.

Import and export prices rose in February, with import prices rising 10.9% YOY and export prices rising 16.6%. Keep in mind that these numbers predate the Ukraine situation.

February retail sales disappointed, rising only 0.3% MOM. Ex-vehicles and gasoline, they fell 0.4%. On a year-over-year basis, retail sales rose 17%, however it is clear that rising gasoline prices are beginning to depress other categories of spending.

Does it seem like mortgage rates are rising faster than the 10-year bond yield? Your gut is correct. MBS spreads (which are basically the difference between the yield on mortgage backed securities and Treasuries are indeed increasing. The Fed’s re-introduction of QE in response to COVID pushed them down, but now that QE is over, they are returning to normal, albeit we are wider than normal. The green bars below represent the MBS spread, which sits at 114 basis points. Note the spike up to 175 in the early days of COVID, when the mortgage market froze and everyone in mortgage-land was getting margin calls.

Chart: MBS Spreads

Some of this widening is due to volatility in the bond market. The CBOE has a volatility index for Treasuries, and that index has been pushing up since the pandemic began. The Fed’s purchases of MBS kind of papered over the effect of increasing volatility, but now the impact is being felt in widening spreads.

Chart: Treasury volatility

The punch line for non-bond geeks: Mortgage rates are rising easily when the 10-year yield increases. They are moving down grudgingly (if at all) when the 10 year yield falls. Note that this doesn’t take into account competitive activity between mortgage bankers. This only represents what MBS investors are willing to pay for generic mortgage backed securities. Mortgage rates have a “Wall Street” component and a “mortgage banker” component. MBS spreads represent the Wall Street component.

Mortgage applications fell by 1.2% last week as purchases increased 1% and refis fell 3%. “Mortgage rates continue to be volatile due to the significant uncertainty regarding Federal Reserve policy and the situation in Ukraine,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Investors are weighing the impacts of rapidly increasing inflation in the U.S. and many other parts of the world against the potential for a slowdown in economic growth due to a renewed bout of supply-chain constraints.”

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