Good Morning on this fantastic Friday,
Stocks under pressure with the Dow down 430. In a repeat performance since Tuesday, Bonds are up nicely. The 10-yr is down to 2.43% (what?). On the news front, although existing home sales beat expectations, they were not exciting and showed meaningful year over year decline in most regions. Also, inventory is growing, price increases barely kept up with inflation. We also learned the Wholesale inventories grew because sales were too slow, this is not good. However, the big news that bonds are reacting to is the global slowing that seems to be gaining attention. This morning Germany released weak manufacturing data and more importantly, the German 10-year reached a negative yield with rising demand. Our curve is inverted from the 3-yr – 10-yr spread and I suspect this is going to get worse. GDP forecasts are dropping like a rock, Brexit is not looking like it’s going to happen easily. No trade agreement with China. All a great recipe for bonds and rates, if we don’t care about the economy. Hopefully and I am sure these tides will turn and when they do, rates are going to move north quickly. I don’t have a crystal ball on any of this but we are substantially over bought and with rates being at the lowest in more than a year, this is the time to lock. Yes, we can continue to improve, but it is going to be tougher than the falling the other way.
Enjoy the weekend and first, make today great!
Good Morning on this fantastic Thursday,
Yesterday was big for bonds. In fact, let’s rename that Big Bad Wednesday. The Fed statement was extremely dovish. No rate hikes in 2019, lower GDP forecast, and an end to the balance sheet runoff. That last part is a little tricky so just to touch on it… while the Fed has been allowing its balance sheet to runoff (not selling bonds, just not buying new ones with the money it is receiving from the payments on the old ones it already holds), it was effectively reducing demand in the market place. The Fed has been, can be, and is going to be again, a big player in that bond space. When they start buying, they will create additional demand which should push rates lower. The hiccup in the plan is that the Fed Statement also indicated they would focus on buying Treasuries and not mortgage bonds so that could be considered negative for mortgages however, as mortgage bonds are also government guaranteed (at this point) and the return is a few points higher than that of Treasuries, I suspect mortgage bonds will continue to be well bid and rates will be low. Another refi boom? Just maybe. For now, the 10-yr is at 2.53% (yesterday we were at 2.60% and mortgage bonds are 30bps better than yesterday at this time). The relaxed monetary policy is also helping stocks and the Dow up 122 points.
One note of interest as it is time to yet again discuss yield inversion, the 2-yr Treasury is at 2.40% today, the 5-yr is at 2.32% (so that is already inverted) and the 10-yr at 2.53%. Spread are very tight and for the curve not to go inverted and send up recession signals, the short end rates will have to drop. We will see, but that would help credit cards and auto loans quickly.
It’s a good day already, make today great!
Good Morning on this fantastic Wednesday,
Bonds are up this morning with the 10-yr back at 2.59% and mortgage bonds +8bps. We get the Fed’s rate decision, their projections, and then the post-meeting conference starting in about an hour and 15 min. There is really no chance of an increase in rates, but I suspect he will remark about concerns over global slowing, trade concerns (President Trump just released a statement that the Chinese Tariffs could go on for an extended period), deficit concerns, and further need to hold off on reducing the balance sheet. Depending on how deep he goes on the commentary, it could be bullish for bonds. The market is just itching for news and clarity on when the Fed will announce the end of its balance sheet reduction. Depending on how soon and how dramatic the runoff ends, the reduction in supply of bonds on the market could increase prices and lower bond yields in general along with MBS and correspondingly hold mortgage rates lower.
That said, if we see even the slightest post-meeting selling it could lead to a major sell off, not that I see that as likely but it is something to be aware of.
Either way, it’s likely to be a volatile day today.
Make today great!
Good Morning on this fantastic Tuesday,
Bonds are in a holding pattern while stocks seem to be taking off on the news from the Commerce Department reinforcing a slowing economy and specifically in the manufacturing sector during January. In a delayed report, factory goods orders increased 0.1% versus a forecast of 0.3%. Orders increased 3.8% compared to January 2018. Manufacturing account for around 12% of the U.S. economy.
The main event for this week will be the FOMC meeting/announcement and Fed Chair Powell press conference tomorrow at 11 am and 11:30 respectively. The market is watching for a new forecast with fewer rate increases and clarity on when the Fed will announce the end of its balance sheet reduction.
So here is where the paths split. Most economists believe the Fed will complete one rate increase this year (targeted in 3rd quarter) and one in 2020. However, based on market futures, investors believe the Fed will reduce rates this year or at a minimum have no price changes. It will take 7 members of the FOMC to change their projections to take the projection to zero in 2019.
I suspect things will be quiet for bonds until tomorrow at midday. The Fed has been able to thread the needle in the past and if they can do it again, bonds will continue in the current stalemate waiting for more economic news, Brexit news, and China trade news. I just suspect there seems to be a bit more on everyone’s mind this time around and am expecting more volatility. I am hopeful it heads in our favor and the 10-yr improves to 2.55% or so. We will see.
Make today great!
Good Monday A.M.,
I hope you had some extra luck on St. Patrick’s Day.
After closing at 2.59% on Friday, the yield on the 10-yr note this morning is around 2.60%, maintaining a move into the next lower (better from a rate perspective) trading channel. This week has minimal economic data to look forward to and the main event will be the FOMC meeting and Fed Chair Powell press conference on Wednesday afternoon. The market has already priced in a patient strategy from the Fed and are watching for a new forecast with fewer rate increases and a slower economy in addition to some clarity on when the Fed will announce the end of its balance sheet reduction. Anything that is more hawkish than markets expect will of course hurt bonds and push rates up.
Most economists believe the Fed will reduce the projected number of rate increases to one in 2019 and one in 2020. It will take 7 members of the FOMC to change their projections to take the projection to zero in 2019. Conversely based on market activities, investors think there is a greater chance the Fed will reduce rates this year. I am in this camp…
Make today great!