All Things in Moderation

Vital Statistics:

Don your crash helmets, it is ugly out there. Stock index futures are limit down. Bonds and MBS are up.

The 10 year is trading at 0.46% after hitting a low of 0.33% in the overnight session. Granted, the Asian overnight session can be illiquid and whippy, but that is shocking. Oil is down 22% due to a tiff between Saudi Arabia and Russia. The German Bund hit a new record low yield, trading at -88 basis points.

The 30 year Treasury is up 10 points. 10. points. The yield is 0.88%. Astounding. The chart of the iShares 20 year government bond ETF looks like an internet stock circa 1999.

TBAs are participating in the bond market rally, but not like the 10 year. The 10-year bond is up 3.375 points this morning. 2.5% TBAs are up 1/2 of a point, and 3% and higher notes are up a quarter. So  rates will be better this morning, but not by as much as you think they should. Also, many correspondents have full pipelines, so they will be adding margin to their rate sheets. We may see little to no improvement over Friday. Just be prepared to explain that to your borrowers.

The March Fed Funds futures are predicting a 90%+ chance that the Fed will cut to zero at the March 18 meeting. The site cautions that the March 3 cut has made the probabilities somewhat inaccurate, but the bet is that we are back at ZIRP by the end of the month. Don’t discount the possibility of another intra-meeting cut. Check out the Feb 7 predictions… roughly a 90% chance of a 2% Fed Funds rate. Now it is a 90% chance of a 0% Fed funds rate.

The week after the jobs report is usually data-light and this week is no exception. The only numbers of note are inflation, and those aren’t going to make any difference.

There are now 110,000 confirmed cases of Coronavirus. There are just under 30,000 cases outside China. 554 are in the US and it has resulted in 21 deaths. Italy is taking drastic measures to quarantine people, so if you had planned a trip to Milan or Venice this spring, you might want to re-think it.

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Vital Statistics:

Stocks are getting clobbered as the flight-to-safety trade takes hold. Bonds and MBS are up. Note we  will have a lot of Fed-speak today, so be aware.

Despite the big move upward in bonds (the 10 – year is up about 2 points), TBAs are barely up. The 2.5 coupon is up about 1/4, and the 3s and up are flat. There is a huge push-pull event happening in the TBA market right now.  First, originators who hedge their pipelines with TBAs are getting hit with margin calls, which is causing a bit of a short squeeze in the market. Basically, if an originator can’t make the margin call, the broker will close out their position, and that means buying TBAs to close out the short position. Most lenders have had a call from their friendly TBA broker-dealer already, and you will probably be able to hear the champagne corks popping after we get past Class A settlement next week. People have been white-knuckling it all week.

On the other hand, increasing prepay speeds are making the higher note rates less and less attractive. If you buy a 3.5% Fannie TBA, you’ll pay 104. You will get back 100. You are hoping that you get enough coupon payments to cover that premium you paid. As rates fall, that chance of making back that 4% premium you paid becomes less and less. So, even though the 10 year keeps falling, eventually mortgage backed securities will participate less and less in the rally (or at least the higher note rates will). And it looks like we are about there. This is a big relief for mortgage bankers who have full pipelines and want to ring the register. Now, about that servicing portfolio….

Margin calls harken back to the bad old days of 2008. Are we experiencing something similar? Emphatically, no. In 2008, we had a collapsing residential real estate bubble, and these are the Hurricane Katrinas of banking. Despite all the fears of a recession, delinquencies are at 40 year lows, and the labor economy remains strong.

Speaking of the labor economy, it is jobs day. Jobs report data dump:

• Nonfarm payrolls up 273,000 (expectation was 177)
• Unemployment rate 3.5% (expectation 3.6%)
• Average hourly earnings up 0.3% MOM / 3% YOY
• Labor force participation rate 63.4%

Overall, a strong report that should take some wind out of the sails of the bond market. Note that this is February’s report, so much of it will be pre-Coronavirus. US corporations are preparing for a mass experiment in remote working, so some of the effects of virus could be relatively well mitigated.

Remember yesterday, when I showed the Fed Funds futures prediction and said it was a toss-up between how big of a cut it will be? Well, it still is. Except now it is a toss-up between a 50 basis point cut and a 75 basis point cut. ZIRP by June?

Who else is driving the rally in the 10 year? Banks. Banks who hedge their interest rate risk with Treasuries are facing similar issues that mortgage bankers are in the Treasury market. Banks with huge portfolios of mortgage loans will sell the 10 year against it in order to hedge interest rate risk. As rates fall, they will need to buy back some of that hedge. According to JP Morgan, banks need to buy about $1.2 trillion in 10 year bonds to adjust their hedges.

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Vital Statistics:

Stocks are down again on coronavirus fears. Bonds and MBS are up with the 10 year trading below 1% again.

The Fed’s rate cut doesn’t seem to be having the desired effect. Volatility in the markets continues, and to be honest, I don’t see how cutting interest rates is going to make any difference. The markets don’t have a credit availability issue, and lower rates aren’t going to entice people to take a cruise all of a sudden. The Fed is also running out of ammo if we do experience a recession.

Speaking of rate cuts, the Fed Funds futures are handicapping a 50% chance of a 25 basis point cut and a 50% chance of a 50 basis point cut at the March meeting in two weeks. The December futures are assigning a 27% chance we go back to zero.

The Coronavirus has certainly been a double-edged sword for mortgage originators. The MBA Mortgage applications index increased by 15% last week as purchases fell 3%, but refis rose 26%.

“The 30-year fixed rate mortgage dropped to its lowest level in more than seven years last week, amidst increasing concerns regarding the economic impact from the spread of the coronavirus, as well as the tremendous financial market volatility,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Refinance demand jumped as a result, with conventional refinance applications increasing more than 30 percent. Given the further drop in Treasury rates this week, we expect refinance activity will increase even more until fears subside and rates stabilize.”

“We are now at the start of the spring homebuying season,” Fratantoni added. “While purchase applications were down a bit for the week, they are still up about 10 percent from a year ago. The next few weeks are key in whether these low mortgage rates bring in more buyers, or if economic uncertainty causes some home shoppers to temporarily delay their search.”

 

If the March Fed Fund futures are correct, we could be looking at mortgage rates with a 30 year fixed rate mortgages with a 2 in front of them. While this could generally be a good thing for mortgage bankers, people that hold mortgage servicing rights are about to get a 2×4 to the side of the head as prepay speeds accelerate. And their broker dealers are asking for more margin as rates rally. The best of times, the worst of times…

Optimal Blue, the loan pricing engine many bankers use has experience record volume and has been experiencing latency issues as a result. Unfortunately Optimal Blue was making some tech migrations when all of this hit.

The CFPB may get its wings clipped at the Supreme Court. At issue is whether the President can replace the Director of the CFPB without cause. The Trump Administration is siding with the Plaintiff in this case and is refusing to defend the Agency’s structure. The House has sent its general counsel to defend the agency. While SCOTUS probably won’t go so far as to rule that the agency be disbanded, it is likely to rule that the President is free to appoint a director that shares his ideology.

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Vital Statistics:

Stocks are lower this morning after yesterday’s rally. Bonds and MBS are up.

The G7 Finance Ministers and central bankers are held a conference call this morning to discuss the recent moves in the markets. While it is a long shot, do not discount the possibility of a intra-meeting rate cut. You could see a coordinated rate cut come out of this, possibly this week. Low probability event, but it isn’t zero.

Yesterday’s market rally was probably due to last week’s “too far, too fast” reaction in the markets. The rally was primarily driven by an expectation that global central banks will lower rates in a coordinated effort to support the economy. That said, how much of an effect will interest rates have? If you are worried about going out and getting sick, i don’t see how 25 basis points on the Fed Funds rate is going to change your behavior. At the margin, it could help businesses which have stretched supply lines, I guess. But cutting interest rates by 100 basis points over the next year in reaction to 105 cases of a disease in the US seems to be going overboard. It would also leave them out of ammo the next time we get a recession.

The ISM Manufacturing Index showed manufacturing barely expanded in February. Coronavirus issues are causing supply chain problems and the 737 Max groundings were also cited.

Construction spending rose 1.8% MOM and 6.8% in January, according to the Census Bureau. Residential Construction spending rose 2.1% MOM and 9% YOY. Coronavirus issues probably won’t affect the housing market much – fixtures are probably the biggest possibility. Luxury properties on the West Coast will be vulnerable as well as many owners are Chinese.

For all the handwringing about home affordability, telecommuting is providing a solution. “The job market is very tight and employers want to hold on to people, so companies are much more willing now to allow workers to move,” said Redfin chief economist Daryl Fairweather. “Plus, technology has enabled employers to let staff work remotely in a cost-efficient and productive manner.”

I am currently at the Lender’s One conference, and have heard from many originators that getting and retaining talent is difficult in this market. Many are paying up, and quite a few are looking at older workers as a solution. If this is happening in other industries besides the mortgage industry, that vast reservoir of over-50 labor that got created in the aftermath of the Great Recession might come on line, which would be fantastic for the economy.

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Vital Statistics:

Stocks are lower this morning on overseas weakness and Coronavirus fears. Bonds and MBS are up again.

The 10 year is trading at 1.28%, but MBS are lagging the move. Be patient with rates, as it will take MBS and rate sheets a few days to catch up. The Fed Funds futures are now handicapping a 58% chance of a March rate cut. A week ago it was 9%. What a difference 250 S&P handles makes…

New home sales rose 7.9% MOM in January, and is up 18.6% on a YOY basis. This is the highest level in 12 years. Mild weather and lower interest rates may have been a driver.  Speaking of new home sales, Toll Brothers reported lower than expected earnings, and blamed it on Coronavirus and CA sales.

The second estimate for fourth quarter GDP came in at 2.1%, in line with the advance estimate a month ago. Consumption was a touch below expectations at 1.7%, as was inflation at 1.3%. In other economic data, durable goods orders fell 0.2% which was better than expectations. Ex-transportation, they rose 0.9% and capital goods orders (which are a proxy for capital expenditures) rose 1.1%. Finally, initial jobless claims rose to 219,000 last week.

Interesting on the flight to safety trade – gold is up. bitcoin is not.

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Vital Statistics:

Stocks have stabilized this morning and rates are up a touch from their intra-day all time lows yesterday. At one point, the 10 year Treasury was trading at 1.31%. This morning, Treasuries are down a touch and MBS are flat. For the most part, MBS underperformed Treasuries yesterday.

Mortgage applications rose 1.5% last week as purchases increased 6% and refis fell by 1%. “Last week appears to have been the calm before the storm,” said MBA Chief Economist Mike Fratantoni. “Weaker readings on economic growth caused a slight drop in mortgage rates, bringing them back to their level two weeks ago, but applications overall moved 1.5 percent higher. Refinance applications for conventional loans dropped a bit, but FHA refinances increased more than 22 percent. Purchase volume remained strong, supported both by low rates and the increased pace of construction over the past few months. With housing supply at low levels, new inventory is a positive development for prospective homebuyers.”

The Coronavirus issue has spooked the Fed funds futures market. The futures are now predicting a 1 in 3 chance of a rate cut at the March meeting. Just one  month ago, the March futures were handicapping a 4% chance. Take a look at the December futures, which are now forecasting 2 or 3 cuts this year.

Note that Dallas Fed President said yesterday: “It is still too soon to make a judgment about how it might relate to monetary policy. I still think we are a number of weeks away from being able to make the judgment” whether a rate change is required.” The April futures are already pricing it in.

Coronavirus fears didn’t do much to dampen US consumer confidence, which rose again. Historically consumer confidence has been an inverse of gasoline prices, in other words, when gasoline rises, consumers get salty and vice versa. Oil is now trading below $50 a barrel, and the refineries are beginning to switch from heating oil to gasoline refining. Good news for the summer driving season.

Luxury homebuilder Toll Brothers reported lower than expected earnings this morning and the stock is getting hammered pre-open (down about 9%). Earnings were down big and revenues missed guidance.

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Vital Statistics:

Stocks are higher this morning as coronavirus fears ease. Bonds and MBS are flat.

The 10 year bond yield traded briefly yesterday below the 2016 closing low of 1.37%. So far, that level seems to be holding. The trader in me thinks that any sort of good news on the coronavirus front will send rates back up 10 – 20 basis points. Big moves generally have decent retracements, and the 1.37% seems to be providing technical support. Note that the German Bund is not at record lows and any bounce up in rates there will be felt in the US. While it feels like the path of least resistance is down in rates over the long term, that might not be the case over the next few weeks. Lock accordingly.

Home prices rose 0.4% MOM and 2.9% YOY according to the Case-Shiller Home Price Index. Separately, the FHFA House Price Index rose 0.6% MOM and 5.1% YOY. The FHFA index only looks at homes with conforming mortgages, so it excludes jumbos and distressed.

It looks like economic growth improved in January, according to the Chicago Fed National Activity Index. Note that Goldman and others are taking down Q1 GDP growth estimates based on Coronavirus.

Intuit is buying Credit Karma, which will help the company create a “personalized financial assistant” to help people manage their money. Credit Karma bought Approved, a digital mortgage platform in 2018, and this will be part of the strategy. “We wake up every day trying to help consumers make ends meet. By joining forces with Credit Karma, we can create a personalized financial assistant that will help consumers find the right financial products, put more money in their pockets and provide insights and advice, enabling them to buy the home they’ve always dreamed about, pay for education and take the vacation they’ve always wanted.”

Joe Biden has a housing plan, which includes returning to the Obama-era CFPB practices (presumably regulation by enforcement action), spending $100 billion on affordable housing, and a tax credit of up to $15,000 for first time homebuyers. The plan also includes aid for low-income renters and a task force to combat homelessness.

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