Good Thursday AM,
Bonds are flat as a pancake as markets await tomorrow’s data.
February personal income, personal spending, and inflation on the PCE, the U. of Michigan consumer sentiment index and March Chicago purchasing mgrs. index PCE numbers. As always, my advice is to not float into the PCE numbers. Anything can happen and the risk is high (If I had to guess, I would think PCE will be on the low end of the expectations, which should help bonds and rates). That said, we don’t gamble. I would let your clients know what is coming tomorrow and if they choose to float, well that is a different story.
Good piece from the WSJ (despite not being positive) on Mortgage bonds (which correlate to mortgage rates):
Mortgage bonds seem to be struggling, a sign of potential spillovers from the present banking crisis to the housing market. The yield gap between mortgage bonds and Treasurys is more than two-thirds wider than historical norms, at about 1.6 percentage points at present versus less than 1 point on average over the past two decades, according to figures compiled by analysts at KBW. That spread has widened since earlier this year and hasn’t been immediately helped by the Federal Reserve’s move to slow its pace of rate increases last week.
There are several inputs into the rates that are offered to home buyers. One important one is how much mortgage-backed bonds are fetching in the market. If mortgage bonds are in demand, that can lead investors to buy more mortgages at lower interest rates. But if mortgage bonds aren’t much in demand, that puts upward pressure on mortgage rates.
The broader backdrop to this is that the Fed stopped buying mortgage bonds as it began to unwind quantitative easing. But banks could, in theory, be stepping up to be buyers in the Fed’s absence. Yet instead, banks and mortgage bonds are in a complicated relationship right now. Mortgage bonds—in particular, packages of home loans guaranteed by the likes of Fannie Mae or Freddie Mac—are a big driver of the unrealized losses on bond portfolios that banks are struggling with. One reason for that is that many homeowners are now effectively “locked-in” to the mortgages they got at rock-bottom rates back in 2020 or 2021, which will likely subdue home-buying activity, according to economists at Fannie Mae.
By the same token, the lifespan—or duration, in financial lingo—of mortgage bonds gets longer as fewer people prepay by selling their homes or refinancing. This means the bank owning a mortgage-backed bond is also locked-in for longer to whatever rate that bond was paying when they bought it—which might now be below the rate that depositors are demanding on their cash. The good news is that banks aren’t likely to sell those bonds, as that would crystallize their mark-to-market losses, thus hitting their capital levels in many cases. Besides, those bonds may be stuck as collateral posted to the Federal Reserve or Federal Home Loan Banks to fund banks’ borrowing of backstop cash.
It doesn’t feel like the consumer is yet comfortable with leaving their money in small/community banks. Those Banks Are Losing to Big Banks. Their Customers Are About to Feel It.
The collapse of Silicon Valley Bank and Signature Bank is testing Americans’faith in the regional and community banks that supply credit to a big chunk of the nation’s entrepreneurs and businesses. The 25 biggest U.S. banks gained $120 billion in deposits in the days after SVB collapsed, according to Federal Reserve data. All the U.S. banks below that level lost $108 billion over the same period, the largest weekly decline in smaller banks’ deposits in dollar terms on record. The panic has subsided, but the deposit swings could have long-lasting repercussions for the communities served by smaller banks. Banks need deposits to make loans; if deposits fall, lending is almost sure to follow.
Please remain safe and stay healthy, make today great!