Good Monday A.M.,
Global unrest over the weekend giving bonds a little pick me up and putting stocks in the red. The US flew bombers and fighter planes closer to NK than since the end of the NK conflict, NK calling that an act of war. Angela Merkel won her fourth term as Germany’s Chancellor but the vote was closer than expected and a left wing faction also won seats for the first time (reading between the lines, left wing sounds very much like nationalists). New Zealand also had a surprise vote and their incumbent lost. It seems the world is ready for change. China announced it would “Curb Prices” in some of their neighborhoods to prevent bubbles from forming. With this and no US economic data today, the 10-yr is at 2.22% and mortgage bonds are up about a baker’s dozen. It’s not much, but if we can claw back 10bps at a time, in a week or so, we may be out of this hole (I don’t think bonds have that much room to run). Busy week for data this one is (GDP later in the week and lots of Fed speak).
Zillow (along with now being hit with a class action law suit in addition to the CFPB audit) was out with this… the bottom third of the market lost 30 percent of their value during the housing bust–and have yet to regain it. The company’s monthly Real Estate Market Report said while median home values reached new peaks in more than half of the nation’s largest housing markets, a closer look at which homes are regaining value reveals an uneven recovery. Zillow said more than 50 percent of U.S. homes have reached or surpassed the value they reached during the housing boom period, but the types of homes recovering are not the same, particularly in the most populated places. In 24 of the nation’s largest 35 markets, the homes in the bottom third of the market are least likely to have recovered the value lost when the housing bubble burst.
That’s it for today, make today great!
Good Friday A.M.,
No economic news today on this first day of Autumn (feels like to summer came and went in the blink of an eye). Bonds finding some footing. Is it that the waters have calmed down or is it that the threats from North Korea are escalating? I am not sure what is driving markets today. I would hope the market is trading on something more than fear, as otherwise gains are not sustainable. Stocks are down, the 10-yr Treasury note is at 2.26% (and still has a bearish bias), mortgage bonds are getting a little sun and are +10bps. Very interesting comment/question further down the thread mentioning the winter Olympics in Seoul in just a few months. Is that a stage to wreak havoc? Yes of course, and it is always a concern, but in this case it is also just 35 miles from the NK border. I am sure we will have more to discuss on this. Next week has some interesting data to look out for (final reading for Q2 GDP on Thursday). The broader picture to me is that the US 10-yr Treasury has a yield of 2.26%, German 10-yr Bund yield at .45%, Japan at .02%, which would you rather buy/own? With US bonds having a better return and having a US guarantee, I suspect US bonds will continue to be popular and rates will stay low.
Enjoy the weekend and first, make today great!
Good Thursday Morning and a very Happy and Healthy New Year if you are celebrating,
Yesterday was painful. The FOMC statement was about as expected. No rate change and the anticipated Fed balance sheet reduction to begin in October. We also got a glimpse into what the Fed participants expect to happen with the Fed Funds rate through the next two years (also called the dot plot). Markets felt the dots were not too friendly as it showed the vast majority of Fed participants are expecting one more hike this year (December) and at least three more hikes next year and put a hurting on bonds. The 10-yr closed at 2.28% and has taken on a bearish bias for now. Not saying that we won’t see improvement but right now with almost no data today and none tomorrow, someone has to step in to buy, no one seems to be interested yet as they seem to be more focused on the bearish technicals. I was hoping for a bounce today but no such luck. The 10-yr still at 2.28% and Mortgage bonds are -2bps on the day. Courtesy of my kid (yes all 3, even the 6-yr old) I get to listen to varied music genres and there is a hip hop song that has a lyric, “get out the way…” That’s about how I am feeling right now about bonds.
On a similar line of thought, Elliott Eisenberg shares that if the Fed reduces its huge balance sheet over the next several years, what will its eventual holdings consist of? Traditionally, it’s only been Treasuries. Now, holdings include $1.8 trillion in mortgage-backed securities, bought to support housing, and $2.5 trillion in Treasuries. As the Fed sells both, rates will rise, but importantly the spread between 30-year mortgages and 10-year Treasuries will widen, pushing mortgage rates up by an extra eighth-of-a-point.
And speaking of homeownership, here is a little perspective on where the US comes in compared to many others. I think they stop giving ribbons after 11th place… maybe we could use a bit more education?
Advanced Economies: Homeownership Rates
Rank Country Ownership Rate Date of Data
1 Singapore 90.9% 2016
2 Poland 83.7% 2015
3 Chile 83.0% 2012
4 Norway 82.7% 2016
5 Spain 77.8% 2016
6 Iceland 77.8% 2015
7 Portugal 74.8% 2015
8 Luxembourg 73.2% 2015
9 Italy 72.9% 2015
10 Finland 71.6% 2016
11 Belgium 71.3% 2016
12 Netherlands 69.0% 2016
13 Ireland 67.6% 2016
14 Israel 67.3% 2014
15 Canada 67.0% 2015
16 Sweden 65.2% 2016
17 New Zealand 64.8% 2013
18 France 64.1% 2015
19 Mexico 63.6% 2015
20 United Kingdom 63.5% 2015
21 United States 63.4% 2016
22 Denmark 62.0% 2016
23 Japan 61.7% 2013
24 Austria 55.0% 2016
25 Germany 51.9% 2015
26 Hong Kong 48.9% 2017
27 Switzerland 43.4% 2015
Sources: Government statistics by country
Make today great!
Good Morning on this fantastic Wednesday,
We have about an hour before the FOMC statement, which will give markets direction. That is the markets only focus right now (despite Mr. Trumps UN speech, another earthquake in Mexico, Hurricanes, missile testing, etc… all of which have moved markets as recently as a week ago). The likely outcome is that the Fed will set the start date for reducing its balance sheet (and leave rates unchanged) but in the wake of 10% fewer mortgage applications this week and 25% year to date, I don’t think the reduction in buying will tip the supply/demand paradigm much. The fed can always surprise us and if the statement, and later Ms. Yellen’s press conference, is more hawkish (or if the Fed raises rates), bonds will take it on the chin. If the statement is dovish, we could see some decent improvement. The 10-yr is sitting at 2.24% and Mortgage bonds are + 6bps. Stay tuned.
Make today great!
Good Morning on this fine Tuesday,
A little bit of data today and it was mostly positive for the economy. Housing Starts and Building permits beat expectations. Also, Import and export prices came in hot. The recent hurricanes and billions of dollars of damages will create a construction boom. This is bullish for the economy and could pressure rates down the road. Tomorrow is the all-important Fed policy decision. It is possible that we get a rally in bonds either way as some traders will be relieved in both directions, but I would always prefer a dovish tone. Not sure if we will get it.
On Wall Street, the conventional wisdom is that once the Federal Reserve finally starts to whittle down its crisis-era debt investments, U.S. Treasury yields will have nowhere to go but up. But to some bond investors, history suggests the consensus couldn’t be more wrong. During each of the Fed’s quantitative-easing cycles, yields rose when the central bank was buying and then fell after it stopped. That ran counter to what many expected based on simple supply and demand as the Fed amassed $4.5 trillion of debt and became the single biggest holder of Treasuries. The lesson, investors say, is that what really matters to the bond market isn’t so much what the Fed is doing, but what the policy changes mean for the U.S. economy in the months and years ahead. In the case of QE, the Fed’s stimulus brightened the outlook for growth and inflation, while the periods in between refocused investors on the mediocre state of the post-crisis economy. Now, as the Fed embarks on its long-awaited QE unwind, doubts about the strength of the eight-year expansion may arise once again and push investors toward the safety of bonds. Currently the 10-yr is at 2.24% and mortgage bonds are +7bps.
A new survey by the National Association of Realtors (NAR) and the non-profit American Student Assistance has found only 20 percent of millennials own a home while carrying a student debt load ($41,200) greater than their annual income ($38,800). As for the 80 percent of millennials in the survey who said they do not own a home, 83 percent stated their student loan debt has hampered their attempt at homebuying. Eight-four percent of these millennials expect to postpone buying by at least three years. And student loan debt is also disrupting their attempts to build the foundation for retirement savings: 61 percent of respondents at times have not been able to make a contribution to their retirement, while 32 percent said they were able to occasionally contribute a reduced amount to their retirement savings.
And diving in deeper on student loans, hundreds of thousands of borrowers accused of defaulting on their student loans may not have to pay a dime over the next several months, or perhaps ever, under a settlement between federal regulators (CFPB) and the owners of private student debt. The agreement with the Consumer Financial Protection Bureau, which still requires a judge’s approval, calls for an audit that consumer lawyers have called unprecedented. Under it, the National Collegiate Student Loan Trusts must audit their book of more than $8 billion of loans, many of them in default, to prove they can document that they own each loan and that it’s not too old to collect. Until it is complete, investors who own the bonds that contain those loans won’t receive any cash from borrowers, even those making steady payments. Instead, the money will go into an escrow account. The settlement seeks to resolve allegations that the trusts illegally collected from tens of thousands of distressed borrowers using deceptive or unfair means, and that debt collectors and law firms for them flooded the nation’s courts with faulty lawsuits to collect.
Black Knight, Jacksonville, Fla., said its preliminary assessment of potential mortgage-related impact from Hurricane Irma shows more than 3.1 million mortgaged properties in Irma disaster areas, representing $517 billion in unpaid principal balances. Black Knight said Irma-related disaster areas contain nearly three times as many mortgaged properties as those connected to Hurricane Harvey and nearly seven times as many as those connected to Hurricane Katrina in 2005. Irma-related disaster areas now include more than 90 percent of all mortgaged properties in Florida.
Last, Zillow shared that home listings across the U.S. that receive 30 or more “favorites” on Zillow within their first week on the market sell in under two weeks and for more money. Conversely, Zillow said homes that get 10 or fewer favorites in their first week go for less money and take more than a month to sell.
That was a mouthful, make today great!