All Things in Moderation

Vital Statistics:

Stocks are flattish as we await the FOMC decision at 2:00 pm EST. Bonds and MBS are flat as well.

The markets still see a 25 basis point hike at the meeting today. We will get a fresh set of economic forecasts as well as the dot plot. Jerome Powell will hold a press conference at 2:00 pm. We could see a lot of volatility this afternoon.

Existing Home Sales rose 14.5% in February, according to the National Association of Realtors. This ended a 12 month streak of declines. Most notably, the median home price fell by 0.2% to $363,000. Prices rose in the Midwest and the South, while falling in the Northeast and the West. The number of homes for sale came in at 980,000 which represents about a 2.6 month supply at the current sales pace. This is indicative of a tight market; a balanced market is about 6 months’ worth of sales.

“Conscious of changing mortgage rates, home buyers are taking advantage of any rate declines,” said NAR Chief Economist Lawrence Yun. “Moreover, we’re seeing stronger sales gains in areas where home prices are decreasing and the local economies are adding jobs.”

The first time homebuyer accounted for 27% of sales which is a pretty low percentage. First time homebuyers accounted for 26% in 2022, which was a record low.

Mortgage applications rose 3% last week as purchases rose 2% and refis rose 5%. “Treasury yields declined last week, driven by uncertainty over the health of the banking sector and worries about the broader impact on the economy. Mortgage rates declined for the second week in a row, with the 30-year fixed rate dropping to 6.48 percent, the lowest level in a month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “However, mortgage rates have not dropped as much as Treasury rates due to increased MBS market volatility. The spread between the 30-year fixed and 10-year Treasury remained wide at around 300 basis points, compared to a more typical spread of 180 basis points.”

MBS spreads are a function of interest rate volatility – when interest rate volatility rises, mortgage backed securities will underperform Treasuries. While the VIX (a measure of stock market volatility) has been relatively muted, the MOVE Index (which is sort of the VIX for bonds) has been spiking:

The spike has been largely due to a massive head fake in the bond market. 2022 ended with a couple of benign CPI prints which convinced the bond market that the Fed was accomplishing its mission and inflation was about dead. The January and February CPI prints (along with a robust January jobs report) caused investors to re-think that forecast and rates spiked. The latest banking crisis has massively increased uncertainty over future Fed moves. The fact that First Republic has been part of the walking wounded is an ominous sign as well that the crisis is still with us.

The punch line is that this uncertainty has caused mortgage backed securities to hold relatively steady while Treasury yields fall. The other problem is that mortgage backed securities have a dark cloud over them given that banks might need to sell them to raise capital.

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