Bonds Hold On to NFP-Driven Gains Despite Some Push-Back Whether you view it as a perfectly logical reaction to NFP coming in at 175k vs 243k or a bit too much of a rally relative to the motivation, no one could argue that bond yields were destined to drop after seeing this morning's jobs report.  But employment data is only worth so much these days.  The main event continues to be inflation and we were reminded of that with the 10am ISM Services data.  The ISM headline was actually rate friendly, but the inflation component was the bigger mover, and it was not friendly.  Bonds lost almost all of their post-NFP gains in response, but managed to level off in the PM hours.  Combined with the 2 previous days of green, the net effect is the best closing levels since April 9th. Econ Data / Events Nonfarm Payrolls 175k vs 243k f'cast, 315k prev Unemployment Rate 3.9 vs 3.8 f'cast/prev Wages 0.2 vs 0.3 f'cast, 0.3 prev ISM Non Manufacturing 49.4 vs 52.0 f'cast, 51.4 prev ISM Prices 59.2 vs 55.0 f'cast, 53.4 prev Market Movement Recap 08:43 AM Modestly stronger overnight with additional gains after NFP data.  10yr down 8bps at 4.50, and MBS up 3/8ths 10:15 AM losing some ground after ISM.  MBS still up 11 ticks (.34) and 10yr down 5.3bps at 4.526 02:16 PM gradually bouncing back and now sideways in the middle of the post-NFP range.  MBS up 3/8ths.  10yr down 7.3bps at 4.507 04:49 PM Very flat since noon with MBS up 11 ticks (.34) and 10yr yields down 8bps at 4.499.

It was an action-packed week for the housing and mortgage market. Wednesday's Fed announcement was the highlight, but we also got several economic reports that caused rate volatility. Thankfully, it was mostly the good kind. The week got off to a slightly stronger start with Monday's only major rate news being updated borrowing estimates from the Treasury Department.  Why would such a thing matter?  Treasuries largely dictate day to day interest rate momentum in the U.S. because they are abundant, simple, and as close to risk-free as it gets.  As such, Treasuries are the universal yardstick for all other debt in the U.S., including MBS, the mortgage-backed securities that have the most direct impact on mortgage rates.  This is why Treasury yields and mortgage rates correlate so well over time. Treasuries can take cues from several sources.  One of the biggest is the change in the outright level of supply.  In other words, how much more debt is the U.S. government issuing in the upcoming quarter?  If that number is higher than expected, it puts upward pressure on rates. Monday's news from Treasury was fairly palatable and roughly in line with market expectations, which allowed rates to stay steady. Things changed on Tuesday when the Employment Cost Index (ECI) data came out.  This is one of several reports that the Fed has mentioned as being important to the rate outlook recently.  Higher numbers mean higher rates, all other things being equal.  This week's installment showed Q1 costs at 1.2, up from 0.9 in Q4 and well above the market consensus of 1.0.  Rates hit the highest levels of the week as a result, both in terms of Treasury yields and mortgage rates.

On most months in modern economic memory, a gain of 175k payrolls would be welcome news for the labor market.  Depending on the context, it still is.  But in today's case, it's much lower than the market expected and not a high enough number to justify the 4.6+ 10yr yields seen yesterday.  Bonds rallied instantly when the news printed, but one rate-friendly jobs report is only a fine tuning adjustment to a rate environment dominated by inflation concerns. Evidence of inflation concerns was available in real time today following the ISM Services data.  The headline was weaker, which would normally be good for bonds.  But the price component was quite a bit higher, which was enough for the bond market to react negatively.   Despite the push-back, bonds remain in much stronger territory and have now mad solid gains 3 days in a row.  Yields are back in line with the afternoon of the last CPI day on April 10th.

When camping here at Yosemite National Park*, you quickly realize that there is one basic product here that has never changed: nature. Mortgage products, however, are always shifting and changing. How’s your adjustable-rate mortgage offering, and training, for LOs? The ARM share of applications last week reached nearly 8 percent. Builder business is another segment always of interest to lenders and vendors, and today’s TMC “Rundown” at noon PT features Robert Dozier with Palmetto Citizens discussing builder business, a credit union building out its mortgage presence, and what it was like being in the room with the team putting together the housing related statements for Biden’s State of the Union address. (Found here, this week’s podcasts are sponsored by Essex Mortgage. Essex specializes in providing exceptional mortgage subservicing solutions tailored to meet your specific needs. Looking to capitalize on your excess servicing strip? Check out Essex’s servicing offerings today! Hear an interview with originator Josh Mettle on the massive changes that are coming in July with the buyer-agent commission issue.) * (I am only bragging a little: sleeping on the ground and then getting up at 4AM to send this out with a flashlight from a tent sitting Indian style is no picnic. It is amazing to me that I have internet while surrounded by granite mountains.) Lender and Broker Products, Software, Services “Are you struggling with scratch and dent loans or small MSR pools? This is our sweet spot at PR Mortgage Investment. We specialize in transforming challenges into opportunities for Independent Mortgage Bankers. Let us turn your unsellable loans and underappreciated servicing into cash. Contact Shane O’Dell or call 602-402-1599 to ensure you receive the fair bids your portfolio deserves.”

The bond market--which dictates interest rates--had a generally favorable response to yesterday's update from the Federal Reserve.  While the Fed didn't cut rates, and while they're increasingly acknowledging that rate cuts are moving farther into the future, they still think data will evolve in a way that results in the next move being a cut as opposed to a hike. Positive momentum continued today, in spite of several economic reports that argued the opposite case.  Had these reports been top tier market movers, the counterintuitive victory would have been highly unlikely. Friday is a different sort of day in terms of economic data.  The big monthly jobs report is in a league of its own when it comes to labor market data, and while it may not currently be the most important report on any given month, it's a consistent 2nd place behind CPI.  After the jobs report, we'll get a strong 2nd tier contender in the form of ISM's service sector index.   These two reports have the power to accelerate or reverse the friendly tone seen in rates over the past 2 days.  As for today, the average lender inched just barely to the lowest levels since April 12th.  This wasn't the case in the first half of the day, but as bonds improved, many lenders were able to issue mid-day reprices. 

Counterintuitive Rally And Asymmetric Risk Bonds began the day in slightly stronger territory and managed to hold the gains after the early economic data which consisted of unfriendly readings in Challenger layoffs, Jobless Claims, and Q1 Unit Labor Costs.  All three spoke to ongoing labor market strength with the latter adding some inflationary fuel to the fire.  But the bond market is apparently tired of reacting to the alarming data from Q1 and March.  Instead, the perfect adherence to previously established technical levels (4.64 and 4.57 in terms of the 10yr) suggests intraday volatility was a factor of positioning and short-covering ahead of Friday's jobs report.  There is some asymmetric risk potential on Friday considering how unfazed bonds seem to be by yet another unfriendly report (with the implication being a greater willingness to chase the bid on a downbeat jobs number). Just remember, the previous sentence tells us nothing about the direction of trading--only probable magnitude. Econ Data / Events Jobless Claims 208k vs 212k f'cast, 208k prev Continued Claims 1774k vs 1800k f'cast, 1774k prev Market Movement Recap 08:34 AM 10yr up from 4.592 overnight lows to 4.621 (still down 1.3bps on the day).  MBS are still up an eighth of a point, but down 2 ticks (.06) from the highs. 12:37 PM Some weakness into the 9am hour, but now at the best levels of the day.  10yr down 4bps at 4.593.  MBS up just over a quarter point. 03:18 PM Flat at best levels.  MBS up nearly 3/8ths and 10yr down 5.6bps at 4.578

Thursday was always destined to be the least interesting day of current week due to its lack of meaningful calendar events, but that doesn't mean we can't see a bit of volatility for other reasons.  The morning hours have generally been good for bonds with overnight gains only briefly interrupted in the 9am hour.  This didn't appear to be related to the 8:30am economic data as it didn't begin until 8:52am.  Either way, those losses are fully erased as we head into the PM hours.

Not all, but many, capital markets folks spent their college years rolling up their sleeves. Some not so much. When originators are asked about interest rates, some LOs may use the line in the clip above: “Oh, man. I only ride them; I don't know what makes them work.” (The current STRATMOR blog is titled, “Relying on the Fed: How Did This Happen?”) Yesterday the Federal Reserve Open Market Committee (FOMC) grabbed the headlines, despite doing exactly what everybody expected them to do: leave rates unchanged. Inflation is still higher than the FOMC would like. Certainly, insurance costs, whether they be homeowner or car, are inflationary. It would be foolish to blame the Biden Administration, or any administration, for things like insurance costs, ships running aground in the Suez Canal, a drought in Africa, or what OPEC does. Such is life, and one needs to ask how much more government interference we need or want. In my opinion, a president consulting with, or instructing, the Fed on the appropriate level of interest rates is not the answer. (Found here, this week’s podcasts are sponsored by Essex Mortgage. Essex specializes in providing exceptional mortgage subservicing solutions tailored to meet your specific needs. Looking to capitalize on your excess servicing strip? Check out Essex’s servicing offerings today! Hear an interview with attorney Peter Idziak on the final rule that bans non-compete clauses in employment contracts, which the FTC ruled on last week.) Lender and Broker Products, Software, and Services

Decent Data and Palatable Powell Bonds managed modest to moderate gains after digesting all of the morning's economic data and events.  None of the reports were too exciting and one might conclude that traders were slightly more interested in buying bonds regardless of the data.  Yields flat-lined in stronger territory ahead of the Fed.  The announcement itself was largely as-expected.  The same could be said of the press conference, but with the qualification that Powell definitely stopped short of expressing as much concern about inflation as the recent data justified.  Rate cuts aren't likely any time soon, but the next move is still seen as much more likely to be a cut rather than a hike.  Markets also appreciated Powell's reiteration that the Fed wouldn't hesitate to do what it needed to do based on the data/economy without considering political implications. Econ Data / Events ADP Employment  192k vs 175k f'cast, 208k prev TSY refunding announcement increases in shorter part of the curve no increases in 10yr and up small buyback announced S&P Manufacturing PMI 50.0 vs 49.9 f'cast, 51.9 prev ISM Manufacturing 49.2 vs 50.0 f'cast, 50.3 prev ISM Prices 60.9 vs 55.0 f'cast, 55.8 prev Market Movement Recap 08:59 AM unchanged overnight and modestly stronger after ADP/Treasury.  MBS up an eighth.  10yr down 2.3bps at 4.66 09:46 AM Slightly stronger leading up to S&P PMI.  No reaction afterward.  MBS up 7 ticks (.22).  10yr down 3.2bps at 4.65 10:05 AM No major reaction to 10am data. 10yr yields are down 4bps at 4.643 and MBS are up nearly a quarter point. 02:18 PM Modestly stronger after Fed.  10yr down 4.2bps at 4.462.  MBS up a quarter point 02:47 PM Additional gains as Powell press conference continues.  MBS up half a point.  10yr down 10bps at 4.587

Wednesday brought a full schedule of events and data for the bond market to digest and bonds dictate day to day changes in mortgage rates.  The morning's data was perfectly palatable, resulting in modest strength heading into the afternoon's Fed announcement. Contrary to impression given by many news headlines on Fed day, there is rarely any significance to the Fed's actual decision to hike/cut/hold steady at any given meeting by the time the meeting actually happens.  Markets will have long since priced in the likely outcome based on economic data and Fed policy transparency. In other words, it was a surprise to no one that the Fed held rates steady at this meeting.  Bond traders tuned in for other reasons--mainly to hear what Powell had to say at the 2:30pm ET press conference. There were a few ways Powell could have framed the recent set-backs seen in inflation data.  Some analysts thought he might say more to entertain the possibility of rate hike instead of a rate cut.  Powell (and, indeed, the Fed announcement itself) definitely acknowledged that inflation data meant a delay for the Fed's next move, but in the press conference, Powell reiterated that the next move was much more likely to be a cut, based on the trajectory of the data.   Bonds improved and many mortgage lenders were able to re-issue slightly lower rates compared to the morning levels.  The average 30yr fixed rate is still elevated by 2024's standards, but nicely lower compared to yesterday's latest levels.