Published Date 9/28/2022
There was a time not too long ago that after 4 pm ET not much would happen, recently that has changed in the chaotic MBS markets. Yesterday at 4 pm MBS prices were 38 bps better on the session, at 5 pm MBSs finished up 70 bps on the day. We have seen this last hour be very volatile of late. This morning the 10 yr. note is improving, at 8:30 am its yield at 3.88% -7 bps from yesterday and adding to the increase in MBS prices (+23 bps from yesterday). Yesterday the 10 hit 4.00% at one point then retreated. Nothing has changed, as we have noted numerous times in recent days, the treasury and MBS markets are very over-extended and due to consolidate. Every technical indicator we use has been flashing overbought near-term signals for days and MBS prices oversold. Maybe some relief today.
Weekly MBA mortgage applications last weekly were down again, the composite -3.7% from the prior week, purchase apps -0.4% while re-finances dropped 10.9%.
The advance US trade deficit for August was thought to be -$88.7B, as reported -$87.3B. Imports m/m -1.7% after -2.9% in July; exports m/m -0.9% from +0.3% in July.
The 10 yesterday hit its highest level since 2008 before slipping back in late afternoon trading. Treasuries remain headed for their biggest annual loss since least 1973, with a Bloomberg gauge of the debt slumping 14% this year. More emphasis from James Bullard, St. Louis Fed, warning the central bank must keep raising interest rates to retain its credibility.
Expect market volatility to continue and increase as liquidity is drying up, traders say the Fed’s reduction of its balance sheet is contributing to volatility, it’s a big issue in the MBS markets as well as treasuries. The Bank of England jumped in to stop its extreme unsettled markets, the 30 yr. gilt dropped 86 bps, the largest decline since 1996 according to the news. The BOE said it would carry out temporary purchases of long-dated debt and delay planned bond sales under quantitative tightening. The rally came after selling drove the yield up more than a percentage point since Friday to as high as 5.14%, a level last seen in 1998.
San Francisco Fed Pres. Mary Daly in a conference yesterday: To keep inflation low and stable, “we have to balance that off with our dual mandate with full employment,” Daly said at the Symposium on Asian Banking and Finance. “Trying to navigate that to bring inflation down while we do so as gently as possible, not to tip unnecessarily the economy into a downturn that actually influences the full employment part of our mandate, is a struggle”… “While there’s hopeful signs, I’m always mindful that we might have to do a little more on demand because supply chains are just sluggish, or supply is sluggish to recover”… “Some of the factors that were pushing inflation down and even keeping the neutral rate of interest so low may be changing,” Daly said. “We might very well come out of this episode with higher inflation and be in a world where we’re trying to balance inflation to the target.” Also yesterday St. Louis Fed chief James Bullard warned that inflation is a “serious problem” and that the central bank’s credibility was on the line.
The rate markets may settle down over the next few days, if they do don’t get caught up with any ideas the Fed will back away from its hard stated objective of another 125 bp increase in the FF rate by the end of this year, some of which is already being discounted in present rate levels.
At 9:30 am the DJIA opened +97, NASDAQ -13, S&P +6. 10 yr. at 9:30 am 3.82% -13 bps. FNMA 5.5 30 yr. coupon +57 bps and +90 bps from 9:30 am yesterday. From now on we will be tracking the FNMA 6.0 coupon, at 9:30 am +57 bps from yesterday’s close.
At 10 am August Pending Home sales, expected -1.4% as released -2.0%, yr./yr. -24%.
At 1 pm Treasury will sell $36B of 7 yr. notes. Yesterday and Monday the 5 yr. and 2 yr. auctions were soft with bidding lower. The dollar’s strength causing soft demand.
Source: TBWS
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