Good Morning on this best day of the week Wednesday, from your Hometown lender,
We had a little data today.
ADP Payrolls came in below expectations, Factory Orders on target, and ISM non-manufacturing was weaker that expected. Markets are trading in a normal way for the moment with both bonds and stocks up on hopes the weaker data will cause the Fed to cut some more. This morning data is a set up for the rest of this week and next. Just this week, we have Chairman Powell speaking at 10:30 then the Fed’s Beige Book is released at 11. Tomorrow brings data on Job cuts and Unemployment claims. Friday is the big day though with the monthly Jobs Report and Consumer Sentiment. A lot to navigate through and it is unlikely that the data will all fall in line. We need to hear some dovish words from Mr. Powell today and then a weak jobs report on Friday to see more improvement in bonds and rates. I think the safer bet is to lock now and float down on the improvement.
I was surprised by the report in the WSJ showing where the most undocumented workers were in the US.
I would have thought the greater concentration would have been in Blue States. How will this affect the Construction industry with tariffs and deportations to come?
Morgan Stanley has dramatically announced that they think the 10 year UST will be down to 3.75% by mid-2025.
They also think the 10 year will be down to 3.50% by year-end 2025. It’s a bold claim. The long end of the curve is the Wild West right now. You are welcome to guess where the 10 year is going as we are at a particularly uncertain moment in bond markets. Why it is uncertain is largely, not entirely, dependent on US politics. Let me explain.
1. DOGE (Department of Government Efficiency). Led by Elon Musk and Vivek Ramaswamy, DOGE’s task is to reduce the federal budget in a significant way. Musk has declared he can cut $2 trillion from the $6.5 trillion-per-year budget. Before you get all excited about losing entitlements, let me say that it is unwise to bet against Musk. If DOGE is able to cut even 1/4 as much of their claimed $2T, it would move long rates down.
Why?
US Treasury securities are the safest, most liquid asset in the world. There is worldwide demand for these bonds, and there is abundant stateside demand as well – from banks, insurance companies, pension funds, and asset management shops. A reduction in the budget deficit – or, dare I suggest, even a budget surplus akin to what happened in the early-1990s in the Clinton/Gingrich years – would push rates down as they would be perceived as safer and stronger investments.
2. 30-year mortgage rates. The spread between the 10 year UST and 30-fixed mortgage rates should be about 175-200 bps. So if we are at 3.75% 10y, the 30-fixed would be in the 5.5%-5.75% range. Right now, the 10y is 4.21% and the 30-fixed is 6.9% – a 270 bps spread.
Can you imagine how bullish it would be if the 10 year goes down to 3.50%, and mortgage rates drop to around 5.5%? I’m not sure where that line is for mortgage rates to cross that starts a massive surge of pent-up housing supply, or a building boom, but it’s somewhere in there.
I was lying in bed last night thinking about how a lower 10 year rate could set off a boom time in America with 5%+ GDP growth for years to come.
Tell me it’s not possible and tell me why. Because I can see it coming!
Demographics is destiny. We have a shortage of housing supply. We need people to move around again, and we need construction to build more supply. All this happens with lower rates.
3. The Fed is Lowering Fed Funds for the foreseeable future. This will create a steeper yield curve, which means that ARMs will become popular again as the intermediate points on the curve (3y, 5y, 7y) that are used to price ARMs will provide significant monthly-payment savings versus 30-fixed. And it’s self-perpetuating. If you have a fixed rate for 5 years, you will either re-fi or move within 5 years. To paraphrase Newton, once the mortgage market gets in motion, it will stay in motion.
Stay safe and make today great!
