Morning Report: The June jobs report comes in strong

Vital Statistics:

S&P futures3,887-17.25
Oil (WTI)103.380.74
10 year government bond yield 3.07%
30 year fixed rate mortgage 5.78%

Stocks are lower this morning after the employment report came in stronger than expected. Bonds and MBS are down.

The economy added 372,000 jobs in June, which was well above the Street estimate of 270k. The unemployment rate remained at 3.6%, and average hourly earnings rose 0.3% MOM and 5.3% YOY. There are 5.7 million long-term unemployed who want a job but were unable to find one, which is still higher than the 5 million pre-pandemic.

Leisure and hospitality, health care and professional / business services added the most jobs. Overall, this report will give the Fed the leeway to raise interest rates 75 basis points at the end of the month as expected.

The demise of First Guaranty and Sprout has people asking if this is the harbinger for another 2008. Given that real estate prices have risen so dramatically over the past two years it is hard to deny the similarities are there. That said, there are big differences. The most important difference is that the products that don’t fit the Fannie / Freddie credit box are still high quality loans. We don’t have the negative amortization (i.e. pick-a-pay) loans that were given to anyone who could fog a mirror. The non-QM loans are often based on rental income, which has been rising at a rapid clip.

Second, the home supply situation is much different today than it was in 2006. In 2006 we were coming off years of overbuilding. For the 10 years prior to the 2006 peak, the US built about 16.8 million units. Over the past 10 years, we have built about 10.5 million. The supply overhang doesn’t exist this time around, homeowners have much more equity and the mortgages that were done since the crisis have been much higher quality than during the bubble years.

Others have pointed out that perhaps the non-QM issue is something more reminiscent of the Russian debt crisis of the late 90s, which blew up hedge fund Long-Term Capital Management. FWIW, I don’t see it – the non-QM market simply isn’t that big. Non-QM issuance is around $20 billion per year, give or take. To put that number in perspective, $20 billion is about half the average daily traded volume of US corporate debt. Year-to-date, corporate bond issuance is about $836 billion. A blow up in the non-QM market won’t even register outside of the mortgage banking space.

My guess is that these firms got stuck with inventory that was depreciating in value as rates rose so rapidly over the past few months. Most of these places hold loans on a sort of warehouse line, and they were being hit with curtailments they couldn’t pay. Don’t forget, there are no products which can hedge the interest rates risk on non-QM. Selling TBAs against non-QM paper is subject to basis risk, which means TBAs and non-QM don’t really correlate all that well. In other words, non-QM paper is basically unhedgeable. This is probably not an issue for lenders who simply buy non-QM for their portfolio, but it is an issue for those who rely on securitization as an exit. Note that this issue doesn’t affect the underlying credit quality at all – NQM securities were falling price due to interest rates, not defaults. This is a huge difference from 2006.

The punch line here is that the non-QM issue is something that isn’t big enough to cause any sort of crisis in the overall economy.

12 Responses

  1. Peak Vox?

    “How abortion bans make inequality worse

    The study that offers a glimpse into a post-Roe v. Wade future.
    By Laura Bult Jul 8, 2022, 11:27am EDT”


    • I dunno about peak Vox but this stuff: “Among the study’s findings is the severe financial impact of being forced to parent a new child when someone is already living in difficult financial circumstances. People who seek abortions, especially later-term abortions, are far more likely than the general population to be living in poverty, or otherwise financially unstable.”

      This is just not a good argument for the one-the-fence or undecided or marginally pro-choice folks who think “you know, for rape or incest or life of the mother it should be available”.

      This is saying: “Kids are freaking expensive. You need to be able to kill them to save money.” No matter how the argument is couched, that’s kind the heart of that argument.

      “Most people want an abortion because they don’t feel financially stable or don’t have a partner they want to co-parent with.”

      I know shit happens and there will always be edge cases but there is a way for people to avoid getting pregnant. The first one being “don’t have sex until you’re ready for the possibility” but also “use multiple methods of birth control, because there are a bunch of them”. And another one is “institute a law that makes the men who get women pregnant legally and financially responsible for the child”. And so on. The “only option is late term abortions” is not true.

      Also, this sounds like an argument for “and once late term abortions on demand are legal, we need to have the government pay for them because of financial hardship or things will still be inequitable”.

      But the Turnaway Study found that 91% of women who were denied an abortion chose to parent, which indicates that adoption is not a feasible alternative for most people.

      You have to pay to read the study which I’m not doing but I’m not getting the sense that the people who don’t give up their kids for adoption are not doing it because “it’s too difficult because reasons, something-something racism and Nazis”. It seems those women who have their children don’t want to give up their children. Who knew! Also it suggests people who give their kids up for adoption are satisfied with their decision so the abstract had to mention “but indepth interviews revealed mixed emotions”. Like what? Like feeling bad about giving up their kid for adoption? So they would have felt better about terminating the pregnancy? Any mixed emotions about snuffing out a potential life with a late-term abortion?

      Again: I’m all for safe, legal and rare abortions. Except in cases of life of the mother I think there should be a limit (though a generous one) on when you can get the abortion. But I do not find the “kill your baby if your poor” argument to be compelling.

      That’s an interesting interpretation. Not “once the kept the child to term and gave birth to it they decided they didn’t want to give it up, that they would rather have the baby once the idea was not just an abstract notion but a living, breathing human being”. No, it was just too hard to give it up for adoption even though I’m pretty sure there’s basically a law saying you can leave a baby at a firestation or something and you’re not legally liable now. The pro-life folks have done everything they can (also not mentioned) to make giving your kid up for adopt easy.


  2. Do any of you know what the “TK” in the title of Taibbi’s Substack, “TK News”, stands for? It never occurred to me to even wonder until today when I read one of most recent pieces that he ended with “More, sadly, TK.”

    Apparently TK is a journalistic placeholder for when a writer submits a draft but intends to add more information to a specific section later, meaning “to come”. I had no idea.


  3. What I love about this piece is the enthusiasm KosKidz have for this project in California.

    Based on, say, their current high speed rail project, why is anybody assuming this place will ever manufacture 1 ml of FDA approved insulin?


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