Good Morning on this fantastic Thursday, March 16, 2023
Busy day… Bond market opened rallying further as stress over the banking system continued.
The 10-yr treasury note got to 3.38% and mortgage bonds were up 30bps. Then it turned on several things.. 1) the ECB raised rates by .5% this a.m., which keeps the Fed on target to hike another .25 next week. 40% of analysts and traders still think the Fed will hit the pause button but I don’t see that as likely. 2) Treasury Secretary Yellen in front of congress this a.m. commented that “Our banking system remains sound” and Americans’ deposits “will be there when they need them”. A big statement from someone who can actually make that happen. 3) A group of financial institutions in talks to deposit about $30 billion in First Republic. Deposit, not loan, not investment, not to buy the bank. These are deposits as a vote of confidence in not only First Republic but also the banking sector. I am sure that numbers 2 and 3 above are interconnected but it doesn’t much matter. On the heels of this news, Equities are soaring, and bonds are on sale. The 10-yr note is up to 3.55% and mortgage bonds are down 30bps.
Last night news broke that mega bank Credit Suisse, received a lifeline and said it would borrow up to $54 billion from Switzerland’s central bank. It’s been a hectic week Credit Suisse. Early on, the bank and others in Europe slid over fears of contagion from the Silicon Valley Bank collapse in the U.S. Then, on Tuesday, the Swiss bank took another hit as it revealed “material weaknesses” in its financial performing in 2021 and 2022. Its shares hit an all-time low Wednesday after its Saudi investors said it wouldn’t be able to pump any more cash into the bank. Then came the Swiss National Bank’s action, which is providing a lift for the moment.
More investors now anticipate that the Fed’s rate increase cycle could be coming to an end due to financial turmoil from the failure of two U.S. regional banks in the past week.
Earlier this a.m., Goldman Sachs boosted its estimate of the odds of a US recession to 35% over the next 12 months in response to increased uncertainty over the economic impact of bank stress. The new estimate is still below the 60% median of economists surveyed by Bloomberg. The Federal Reserve’s emergency loan program may inject as much as $2 trillion of funds into the US banking system and ease the liquidity crunch,.
This is a good snippet from Rob Chrisman. It is important to recognize that mortgage pricing (rate and fees) is as tied to the supply/demand curve as every other commodity is. When there is demand, markets function normally. When there is no demand, well price action is erratic. The bottom line is for the moment, we cannot expect that.
“Agency MBS prices have nearly disconnected from Treasuries. The yield on the 2-year Treasury security has seen its largest rate move in 35 years, we’ve seen a large spike in implied volatility, and a large “risk-off” move led by the financial sector certainly argues for more risk premium in spreads. But as one trader put it, “Rather than viewing this as a buying opportunity, it seems most market participants now expect further widening from here, seemingly for a couple main reasons. 1) The SVB and Signature asset portfolios are likely to come out and be a significant weight on the market, and 2) the fallout from these events solidifies the fact that banks will never buy Agency MBS again (and possibly sell). “In general, Quantitative Easing went on for too long, and forced banks to reach for yield “out the curve” (like 10-year or 30-year instruments) at the worst possible price at the worst possible time, immediately followed by a violent reversal of monetary policy. Depository banks have already decreased their demand for MBS… will it continue? And if it does, who will be the natural buyer for MBS, jumbo, and non-Agency securities?”
Please remain safe and stay healthy, make today great!