Morning Report: Global sovereign yields fall after the UK Government reverses course

Vital Statistics:

S&P futures3,65967.75
Oil (WTI)86.490.88
10 year government bond yield 3.93%
30 year fixed rate mortgage 6.97%

Stocks are higher this morning as bank earnings reports continue to come in. Bonds and MBS are up.

Global sovereign bond yields are falling as the UK reversed its tax plan which weighed on Gilts and the UK pound. Yields on UK Gilts fell 43 basis points overnight, which is pushing down yields on Bunds and Treasuries. IMO this accounts for the rally in Treasuries today. Bottom line: The Bond Vigilantes are back, and they just won a battle.

The upcoming week won’t have much in the way of market-moving data. We will get some housing data, with housing starts, existing home sales and the NAHB Housing Market Index. We will also get the Index of Leading Economic Indicators and industrial production data. The stock market will be driven primarily by earnings.

One thing to keep in mind with bank earnings – we are seeing a big effect from provisions for credit losses. In early 2020, banks took humungous provisions for loan losses due to COVID. Those potential losses never materialized, and by this time in 2021 many banks were reversing these provisions, which has the effect of increasing earnings. In other words, last year’s bank earnings were artificially high, which is creating some strange year-over-year comparisons, especially as banks are beginning to provision for credit losses in anticipation of further slowdowns in the economy. My point is this: year-over-year earnings comparisons should have an asterisk next to them.

Despite all of the fears in the market, residential mortgage backed securities backed by non-QM loans have mirrored their agency counterparts, exhibiting low delinquency rates. As expected, prepay rates have fallen, although that is less of an issue for non-QM RMBS as it is for agency.

Money quote: “Although voluntary prepayment rates have recently fallen, the share of delinquent loans remains low, new delinquency rates are low, serious delinquency cure rates are muted, liquidations are infrequent, loss severity rates are low, and losses are near zero. That said, non-QM RMBS will continue to face growing uncertainties with respect to the near-term economic growth, unemployment rate, household incomes, and home prices. Even if the delinquency rates rise somewhat due to the slowing economy, DBRS Morningstar considers existing non-QM RMBS to have a meaningful cushion to withstand the headwinds, barring a sharp economic downturn coinciding with a sharp drop in home prices.”

IMO, strong performance from non-QM paper should go a long way towards bringing back the buy-side into the non-agency market.

24 Responses

  1. Kanye is buying Parler. Explains why JP Morgan closed his accounts.


  2. I really regret not watching the ‘Bama/Tenn game on Saturday. Was it really that good?


    • McWing:

      It was unbelievable. Hugely exciting, and the fact that ‘Bama lost made it that much better. The whole weekend was probably the best of the college season so far. A whole bunch of games came down to the wire.


      • Dang! Now I’m really regretting it though I do not share the universal ‘Bama loathing. Not to many years ago (ok, 20 years ago) Florida was universally loathed. Spurrier seems to be the perennial target like Coach K at Duke was and Bobby Knight before him.

        Now, you want coaches that should be loathed? Buddy Ryan and Jerry Tarkanian. Those two guys WERE BAD DUDES!


  3. Need to read this a couple of times to really get a good understanding of it.


    • Reich is such a hack.


      • I’d actually rate him worse than Dr. Cowbell.

        This was funny in the NYT today:

        “When Chuck Schumer got Joe Manchin to sign on to the bill, I thought it was clever to put it under the title of inflation reduction, as opposed to climate. Now it looks like political malpractice, since it gives Republicans a campaign punch line as inflation stays high. ”


    • Companies are creating inflation by taking advantage of inflation to raise prices. Thus creating the inflation they are taking advantage of. How does that work?


  4. Lol! “Fang Fang Swalwell”!

    Totally worth it!


  5. RCH man, RCH.



    Just don’t call it entrapment.


  7. This is good


  8. Not the Onion:

    “Judicial elections are a time bomb that could blow up our democracy
    By Paul Waldman
    Columnist |
    October 18, 2022 at 7:00 a.m. EDT”


    • Either it’s gaslighting or they literally don’t understand what the word “democracy” means beyond “us getting things we like”.

      He says: “The fact that we elect judges at all is utterly perverse.”

      Because … democracy is utterly perverse? It’s framed like he’s worried about democratic norms but what he’s really worried about is too much democracy. And of course accountability of public servants to the general public.


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