Morning Report: Mortgage rates rise while the yield curve flattens

Vital Statistics:

S&P futures4,60638.2
Oil (WTI)100.42-5.79
10 year government bond yield 2.44%
30 year fixed rate mortgage 4.94%

Stocks are higher this morning on potential peace talks with the Russia – Ukraine situation. Bonds and MBS are up.

Job openings came in at 11.3 million last month, according to the JOLTs jobs report. The quits rate ticked up to 2.9%, which is a harbinger of wage inflation going forward.

Consumer confidence improved slightly in March, according to the Conference Board. While consumers’ present situation is improving, their expectations about the future are weakening. High gas prices, rising food prices and the war in Ukraine are probably negatively affecting sentiment.

MBS spreads have been widening as we head into the end of the quarter. This means that mortgage rates are rising faster than Treasury rates. Much of this is based on fears that the Fed will start selling its portfolio of MBS. You can see the chart of it below as the divergence is widening.

I talked about yield curve inversion yesterday. Here is a better description of what I was talking about. Below is a chart of the 10 year bond yield minus the 2 year bond yield. When the 2 year bond yield is higher than the 10 year bond yield, the yield curve is said to be inverted. The shaded areas represent recessions. The signal was correct in 1980, 1981 and 1991. It lagged in 2002 and 2006, although the economy did enter a recession soon thereafter.

Anyway as I look at my Reuters screen, 10s-2s are at 5 basis points. The yield curve is indeed flattening, and this will be something to watch. The Fed may have painted itself into a corner and will have to cause a recession if it wants to quell inflation. I am sure they are hoping the supply chain issues will work themselves out, but I don’t know what will cause the tight labor market to reverse course. Even if wages aren’t rising super-fast they do create shortages and that cases prices to rise.

Speaking of shortages, we have a big one in housing. House prices rose 1.8% MOM in January and are up 18.2% on a YOY basis, according to the FHFA House Price Index. “House price trends notched up slightly in January,” said Will Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “Rising mortgage rates in January certainly reflect a major change from the past several years, but lending costs remain relatively low. The mortgage rate shift has not dampened upward price pressure from intense borrower demand and limited supply.”

Homebuilder KB Home reported earnings recently. Revenues were up 23% YOY as average selling prices rose 22%. “Our first quarter results reflect solid year-over-year growth, with diluted earnings per share increasing 44%. Market conditions are healthy, driven by a low supply of available inventory and favorable demographics, along with steady employment and wage growth. Against this backdrop, we produced a seasonally strong monthly absorption pace of 6.6 net orders per community, as demand for our personalized homes remained robust,” said Jeffrey Mezger, President, Chairman and Chief Executive Officer. “While we grew our revenues 23%, as the quarter progressed, supply chain issues intensified and an already-constrained construction labor force was further stressed, which extended our build times and delayed completions and planned deliveries. We will continue to work on addressing issues as they arise to navigate these challenges.”

In other words, the supply chain issues aren’t working themselves out – in fact they are getting worse not better. Metzger said on the earnings conference call that the challenge is completing homes, not selling them.

27 Responses

  1. Interesting approach:


  2. So, the left wants corporations to influence government?

    Like, cooperate? Work hand in glove with the state? Everything in the State? Nothing outside the State? Nothing against the State?

    Like that?


    • yes, now that they have captured them.
      and if you disagree you are an authoritarian fascist.


    • All of my more conspiracy oriented friends keep pointing out how many Disney employees have been arrested recently.


      • I think the alphabet army is overrepresented in culture and media. and that is what is driving it.


        • Of course, and they also have outsized influence in the Democratic party as a result.

          I’d actually add a caveat:

          It’s not the alphabet people themselves driving this so much as the people who buy into the ideology of inter-sectional discrimination and the hierarchy of victimhood and then advocate on their behalf.

          The latest indicator of this is the number of straight people in that movement who now identify as queer to try and appropriate some victim status.


        • Despite twitter accounts, I would be surprised if any significant number of straight folks identified publicly as queer. Now, if closeted homosexusals are saying they are straight people who identify as queer, then I would not be surprised.

          Brent, the military says they have no problem with homosexuals in the ranks wrt readiness. Do you think this is just an official line, or mainly true?


        • Mark:

          Despite twitter accounts, I would be surprised if any significant number of straight folks identified publicly as queer.

          Do you know what “queer” even means? If you do, please explain it to me, because I have no idea.


        • It means gender non-conforming. And usually gay. But you could also be straight and acting gay. Or gay and living straight.


        • KW:

          It means gender non-conforming.

          I genuinely have no idea what that means, either.


        • Ok, boomer!

          But it means using amorphous sexual orientations that may in fact just reflect preferences or fetishes or nothing at all as a way of saying “I’m different and special pay attention to me”. IMO.


        • Younger folks identify as queer or bisexual to, you know, be hipper-than-thou amongst your peers.

          Plenty of dudes these days confess to being bisexual before attempting to get some highly cis-gendered heteronormative sex.


        • I’m pretty sure there’s a huge generation gap here and they are over-represented on progressive Twitter.


        • “I genuinely have no idea what that means, either.”

          Guys with girlfriends who wear dresses.

          See the kid who got charged in the Loudon county case and Will Smith’s son, Jaden modeling women’s clothing for Louis Vuitton.


        • jnc:

          Guys with girlfriends [and] who wear dresses.

          Are guys with boyfriends and who wear dresses gender non-conforming? How about lesbians who don’t wear dresses? Are they gender non-conforming?

          I am trying to figure out exactly what one must conform or not conform with that makes the determination.


        • It’s however they feel like identifying at the time to make them special and important for reasons.


        • I think queer is the catch all for anything that doesn’t fit in the other letters but doesn’t want to be considered straight.


  3. Worth a read:

    “Just as in the 1970s, excessively inflationary policies were followed by bad luck, and just as in the 1970s, the authors of the expansionary policies chose to interpret all the problems as being a consequence of the bad luck, even though some of it was a consequence of their policies.”


  4. “You have to understand this to understand our media class: the number one priority in their entire lives, above and beyond literally any other, is to earn insider status with other people in media. That’s it. That is their lodestar, their true north. They want other people in media to see them as cool and smart and fuckable, and most of all they want to have the right opinions, the opinions that the group doesn’t laugh at.”


  5. I get the ridiculousness of Biden/Warren’s Billionaire tax but this is one fight the Republicans should allow the Democrats to have. Abstaining while letting their donors get the shaft is fine with me as is Democrats finding reasons not to pass such stuff that pisses off their donors.

    Do establishment R’s get this? I fear not and I expect McConnel et al to express outrage and take the side of Big Tech Billionaires because Uniparty.


    • Manchin is already a no, so this is going nowhere


    • It’s not worth letting them set the precedent of being able to tax unrealized capital gains. This will be extended to everyone, just like the regular income tax was.


      • I would abstain from the debate and let the Democrats implode on it. There is no way Schumer and Pelosi allow this to pass, so why put yourself and the party in a position where you’re defending billionaires from taxes?


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