All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	3,898	-22.25
Oil (WTI)	86.43	-1.44
10 year government bond yield		4.04%
30 year fixed rate mortgage		6.95%

Stocks are lower this morning as we start Fed week. Bonds and MBS are down.

The upcoming week will have a lot of market-moving events. The biggest event will be the FOMC meeting on Tuesday and Wednesday, with the Fed Funds futures handicapping a 86% chance of a 75 basis point hike and a 14% chance of 50. We will get the jobs report on Friday, along with the ISM data and productivity.

The government is beginning to worry about liquidity in the Treasury market. One of the problems with borrowing a lot of money is that you need to continue to attract a lot of money in order to roll over the maturing debt. The fear is that we could get some failed auctions. Part of this is being driven by the events in the UK, where yields on UK Gilts (The UK’s version of a Treasury) spiked some 120 basis points in the course of a few days.

The root of the buyers strike is due to a lot of things, but the ultimate reason is nothing more than price and value. With inflation running at anywhere between 5% to 6%, a 10-year Treasury paying 4% isn’t an attractive investment. Global central banks have engineered a bubble in sovereign debt, which is something I don’t think we have seen before. Central banks in general have only been around for about a century so this is all new territory.

Note that the Fed is now paying more in interest than it receives in income from its Treasury and MBS portfolio. The Fed pays all of its profit to Treasury, and now that it is running losses, it is accumulating an IOU. When the Fed starts earning profits again, those profits will pay off the IOU. The Fed also does not mark its portfolio to market, which is good news because it is probably a few hundred billion dollars underwater on its MBS portfolio.

Public interest lawyers are warning that the 5th Circuit’s ruling on the CFPB’s funding structure could upend the mortgage market. “The Fifth Circuit’s decision threatens to paralyze mortgage lending in Mississippi, Louisiana, and Texas because lenders will lose certainty about what law applies to future mortgages that they make,” McCoy said, referring to the states within the Fifth Circuit. She was part of the original leadership team at the CFPB during the Obama administration.

“We do like to settle rules that give us some safe harbors for the way that we make mortgages and we don’t want that to all go away,” Mortgage Bankers Association president and CEO Robert Broeksmit said Monday at the trade association’s annual convention. Still, he vowed to keep fighting what he called the bureau’s regulatory overreach. “Now is no time to make you hire more lawyers to try to understand what the bureau is doing.”

FWIW, the MBA believes this ruling would only affect payday lenders, however the CFPB’s days of being exempt from the appropriations process are probably over.

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