Good Morning on this exceptional Wednesday,
Just a quick recap, yesterday stocks started the day strong, got stronger, and the Dow was up 900 points. Then the afternoon hit and the Dow sold off all the gains and ended up in the red. This morning, we are seeing a similar pattern so far. Opened +250, currently +600. We will see how it ends. I am a believer this is a bear market bounce and not a change in sentiment. Trades being made on positive news (we do not yet know if it is even true) about the virus. Employment seems to be cratering along with economic output. We will have more insight on the unemployment claims tomorrow, but I while I am hopeful we don’t have another 6.6mm new claims as we did last week, I don’t see any chance of it being normalized to less than 200k. For perspective, during the great recession, it took months for unemployment claims to hit 10mm. During this recession (I believe we are in one), it took 2 weeks. I don’t mind using the word recession as it, to me, really identifies an opportunity forthcoming. The goal is to exit it as quickly as possible.
On to bonds, the 10-yr is at .75 and right about where it was yesterday. More importantly, it is right about where the Fed must want it. If not, they would be buying more. Mortgage Bonds are down slightly. Same start we had yesterday. We’ll see how they trade for the rest of the day, although I am fairly confident the Fed will not allow Mortgage Bonds to drift much either. The challenge continues to be the Grand Canyon sized disconnect between mortgage bond pricing and interest rates. These two are supposed to be, and have for the most part always been, intertwined. That is except for the past 3 weeks. The correlation is limited and spreads could widen based on some comments from Mark Calabria, the Director of FHFA. Dr. Calabria is not too interested in supporting the mortgage banking sector at this time and is willing to allow the lack of capital to fund his forbearance program increase rates to the consumer and put servicers out of business. What a great appointment he has turned out to be. On the other side, Ginnie Mae (the entity that handles government loan securitizations) has taken a much more appropriate stance and has created a liquidity facility to allow servicers to operate. This should, contrary to FHFA/conventional methodology, help government loan pricing. My apology if this is a bit technical and direct, but having been in this industry for 22 years and enjoying every day working with and for the best people I know, I am passionate about the service we provide.
There is no meaningful economic news this morning, although it will be interesting to hear the minutes from the last FOMC meeting later today. If you recall, that meeting ended up being earlier than planned as it was deemed an emergency. The Fed decided to reduce the Fed funds rate to zero. The minutes should be 1) enlightening and 2) bond friendly.
I was able to review some recent data on sales of both new homes and resales. Some markets have sales down 75% from just 30 days ago. I would expect there are/will be some deals to be had. Stay focused on the future, this will pass.
Lastly, regarding forbearances, please be knowledgeable before jumping in. I know it can sound great to be able to not make a payment however, those monies are still going to be due. Most people will not be able to catch up as the servicer will require when the forbearance period is over. Being in a forbearance could also render that borrower ineligible for a future transaction. Knowledge is important here, please let me know if I can help in any way.
Please stay safe and healthy. Make today great!
