Good Friday A.M.,
No news today but bonds opened strong and are currently trading above the top of the channel and above resistance. We can’t get too excited just yet, we need to close up above these levels, if we hope to spark any real buying. The 10yr is at 2.87% and Mortgage bonds are +23bps. Next week is a HUGE news week, with GDP, durable orders, Personal income, ISM index and more. These releases will likely have a big impact on the market next week and hopefully, we can end this week strong and enter next week with some positive momentum.
The MBA shared a pretty interesting chart to make us all feel wealthier:
As house prices climb, the amount of American homeowner equity continues to grow. As of the third quarter of 2017, the Federal Reserve estimates owners’ equity – that is, aggregate home value less outstanding mortgage debt — is $14.1 trillion. Home equity has surpassed the previous peak of $13.4 trillion from the first quarter of 2006 during the last year, recovering from the great price correction that more than halved home equity positions. Home equity holdings were 40 percent higher than the aggregate value of household and non-profit checking and savings accounts in the third quarter, emphasizing its importance on the household balance sheet. At the same time, the percentage of home value accessed or borrowed through home equity lines of credit (HELOC) or loans has declined steadily since 2008 when falling house prices caused the share to rise to an unprecedented level. It now stands at just 2.4 percent of home value compared to pre-boom levels of 3 to 3.5 percent. As interest rates slowly rise, home equity loans may become increasingly attractive to potential borrowers who seek to preserve the low rate of interest in their current mortgage. Despite the fact that the recent Tax Cuts and Job Act eliminated the deductibility of interest for these loans through 2026, the IRS issued guidance (IR-2018-32) this week stating that the interest on home equity loans and HELOCs for buying, building, or substantially improving the home securing the loan will be deductible… Good Stuff.
More next week. Enjoy the weekend and first, make today great!
Good Thursday A.M.,
The data point today was Unemployment Jobless Claims: Actual 222K, Consensus 230K, Last 230K.
Wild ride continues. Yesterday’s we read the FED minutes from January and after a collective pause, bonds tanked and pushed the 10-yr to 2.96%. Mortgage bonds ended off 37bps or so. The Fed minutes revealed officials see increased economic growth and an uptick in inflation as justification to continue to raise interest rates gradually. Without some data to the other/weaker side (and quick), the minutes solidified expectation for an increase at next month’s Fed meeting. Markets already have that (and maybe another hike) priced in. There may be some bond buyers stepping in now that we are close enough to that 3% target. Bonds improved a tad this a.m. from yesterday’s rout with the 10-yr at 2.92% and mortgage bonds clawing back 20bps of yesterday’s loss. Dow is up 330 points right now and not showing signs of cracking under the auspices of higher rates.
St. Louis Fed President James Bullard was on CNBC today beating a different drum. Yes, the economy is improving but he does not see it likely necessary for the Fed to raise rates four times this year. He said it would take almost perfect economic data throughout the year to get there.. Good to hear, but unfortunately Mr. Bullard is not a voting member this year so has less swagger with markets.
Positive takeaway is we are close to flushing out all of this out.
Make today great!
Good Wednesday A.M. on this best day of the week…
There may be a clearing in the clouds. No promises, but it’s not all doom and gloom (and it’s also not guaranteed). Existing Home Sales missed expectations but the market is far more focused on the FOMC minutes that will be released later today. We also have a 5-year auction taking place. Let’s hope the minutes are not overly Hawkish and that the treasury auction goes well. The last 5-year auction was poor and created a big sell off in bonds. Technically we are in a better spot than we’ve been for a while, as we’ve slid across and up enough to touch the top of the downward channel. Something similar is happening on the 10-year and move below 2.80% (keep in mind we are currently at 2.90%) will likely trigger a lot of buying. So, we need the 10-year treasury close below 2.80%. Today’s minutes and auction will be key to making that happen. Thank you Dan Rawitch.
Short and sweet. I would anticipate some volatility after 10 a.m.
Make today great.
Good Tuesday A.M.,
We are back at it after the holiday. Markets opened down (why should we have two positive days in a row?). No news today and the entire week is very light on news. The DOW is down around 80 points on the news Walmart missed sales expectations. It’s not having much impact on bonds. The 10-year Treasury and younger and better looking brother mortgage bonds getting are roughed up a little. The 10-yr back to 2.90% , mortgage bonds off a bit as well. We’re pretty close to the bottom. With no data to digest, the markets seem focused on the amount of debt the Treasury will have to issue to pay for the budget. More supply and less demand makes rates go up. Sprinkle in some rhetoric (no evidence) that inflation is creeping into the economy and the move higher in rates all seems very logical, although I think we may also be back filling the reasons bonds are worsening. We’ve been talking about a 3% 10-yr Treasury note since early January. That’s the line buyer’s see as the place to reenter (why would you buy fuzzy dice today if you knew they were going to be on sale next week?) so we can be pretty sure we are going to get there (in bonds that is no dice… I have no idea what is happening with the cost of those bad boys). May be a few good days in between now and 3% but even if not, our pricing is close to where that will be. The more ominous question is what happens if 3.04% is not the top and the 10-yr keeps going north.. well that would be baaad. I’m not losing sleep yet, but it is rattling around my brain… that would put in a new ceiling at 3.80% so mortgage rates would go up another .75% – 1.00%. The odds are significantly better that the bonds will come down from 3%, but I had to mention the possibility.
Make today great!
Good Friday A.M.,
Bonds having a good start to the day. No real reason other than the sell trade may be getting stale and there are a lot of folks shorting bonds right now and they may be covering some of those positions. Matt Graham shared some great insight this a.m. on short covering:
“This occurs when a short position (someone who is betting on yields rising, in the case of the bond market) hits a certain target or time limit and exits that position. A short position is exited by buying bonds. This buying, in turn, can cause trading levels to hit a short-covering target for another trader, and the cycle can snowball. In addition to those sorts of snowballs of stop-loss short-covering (i.e. traders buying bonds to close short positions because bonds have improved by a certain amount after running higher in yield for the most part), there are also simple calendar considerations when it comes to exiting positions. One of the most common situations is the 3-day weekend (like the one beginning tomorrow!). Traders are often more likely to exit positions ahead of a 3-day weekend, especially if those positions have had a good run and especially if other markets will be open on the associated holiday. This weekend meets both of the above criteria. Thus, a Friday morning rally today is almost certainly getting a lot of support from the massive short base exiting some of those positions ahead of the long weekend. The point is that the rally doesn’t necessarily represent organic buying demand in bonds. All this talk of short-covering aside, keep the prime directive in mind. This bond market needs to show us a certain amount of commitment before it makes any sense to be optimistic about a consolidation, reversal, or temporary bounce. The following chart lays out a few lines in the sand.”
Stocks doing well, as the Dow is up 170. A bit of economic news which if anything was a bit stronger than expected. The 10-yr is at 2.86 and mortgage bonds are +33bps which brings us back to just about Monday’s pricing. If we’ve learned anything over the last few weeks, it would be to lock into the improvements. I would likely wait a bit to see if this morning’s improvement has longer legs. If not or if we start to give back the improvement, I would consider locking.
All for now, enjoy this holiday weekend and first, make today great!