Good Friday AM,

 

This has been an interesting week for sure.

 

• The economic data was mostly better than expected and it was again today. Maybe we are navigating the economics of Covid better than thought? I would like to think that is the case.
• FHFA (the real boss of Fannie Mae and Freddie Mac) with no forewarning, hijacked every lenders pocket (which really means, every borrowers pocket as the costs will be passed on to the consumer), to the tune of .375% in rate. This was truly a kick in the… well teeth.

I guess the glaring question is where do we go from here? The 10-yr is at .71 where last week it was at .50. The bond market is showing some signs of settling down although it is too early to know if the selling is over.

 

Matt Graham shared some insight. It is a bit technical and opaque but the graph is on point. Bottom line, is he is optimistic.

 

Nonetheless, I’d generally expect that most of the disconnected movement between markets and rates would have happened yesterday.  If the broader bond market is able to find a supportive ceiling for rates, the mortgage market should benefit from that as well.

 

So is the broader bond market going to find a supportive ceiling?  If you’d asked yesterday morning, the answer would have been “maybe” or even “probably pretty soon!”  But any time after 1pm and the magic 8-ball was much cloudier if not outright pessimistic.  The 30yr bond auction caused yields to spike up to the highest levels since late June, thus making for a steadier continuation of negative momentum (as opposed to negative momentum that looked like it might be fizzling out).

 

We’ve seen a somewhat similar turn of events recently.  In early June, bonds experienced 3 days of heavy selling.  Throughout those 3 days prices tried to stage various comebacks before ultimately blowing out to the lowest levels in a few months (or highest levels in terms of 10yr yields).  Same story today.  Will we see a similar turn of events?

 

The rightmost green candlestick is today’s trading so far.  In the bigger picture, simply being able to consider a ceiling bounce here means that bonds are doing exceptionally well.  A month ago, we wouldn’t have been surprised to see another move back up into the 0.9+ range, and 0.74% looked like a ceiling that ran a high risk of being revisited.    The fact that we’re only barely getting back up to .74% after 3 days of heavy selling speaks volumes to the underlying demand for bonds.

 

It’s never safe to assume we know what the future will look like for bonds.  What we can say is that this week has actually been a pleasant surprise as far as technical corrections from all-time low yields goes (not counting March 9th).  Is there a possibility that the pain subsides from here?  Yes, but my point is that even if yields go a bit higher, we’d still be in good shape in the bigger picture.  Things only look as bad as they do if we compare them to the last few weeks which, in my mind, were surprisingly strong.

 

There is not much data coming out next week, so markets will be left to trade on supply and demand… and, of course, any virus news.

Please remain safe and stay healthy, enjoy the weekend and first, make today great!