Last week, I came across an article with this headline: “Bank Of Canada Will Raise Rates 500% This Year, To Start Within Weeks.” Pretty scary headline right? The article claimed … Continue Reading Don’t Fear the Rate Hikes
Well, here we are again. Right back where we were last year. Provinces across the country have reintroduced restrictions that will no doubt leave a lasting impact on our economy. … Continue Reading Will Lockdowns Have an Impact on the Housing Market?
Spoiler alert: this isn’t one of those pro-renting articles that seem to be so in-vogue these days. You’ve probably seen the type. They purport that contrary to popular belief, if … Continue Reading Is It Better to Rent or Buy Your Home?
For months we’ve been warned by “experts” that rates are sure to shoot up. That the Bank of Canada will change their tune based on the state of the economy. … Continue Reading Surprise, Surprise: No Rate Hike From Bank of Canada
My father keeps the news on constantly. It’s like an addiction, and CP24 is his drug of choice. It hurls bad news all day and all night. Not because it’s … Continue Reading What Nobody Is Telling You About Fixed Rate Mortgages
The fixed rate versus variable rate debate has never been more heated. With fixed rates currently averaging historical lows of roughly 2.25%, a lot of people are left wondering, “why … Continue Reading Don’t Fall For Low Fixed Rates
You might have heard some sensationalist news stories over the past year about Canadian homeowners over-borrowing. With the employment rate so low, and mortgage debt so high, how could Canadians … Continue Reading Despite Uncertainty, Canadians Are Keeping Up With Mortgage Payments
January has been a month marked by the market's adjustment to a shift in the Fed policy outlook. This began right at the outset and resulted in higher rates and lower stock prices. Why? Last week's commentary goes into great detail on the matter. Revisit it HERE. This week merely served to confirm what we already knew , namely that the Fed would not be making any policy changes this week, but that it would do nothing to push back on the expectation for policy changes at the next meeting. Language was added to the announcement to suggest a rate hike at the next meeting, and there was no change to the pace of tapering (which will be concluded before the March Fed meeting). Last but not least, Powell said the Fed remains on track to begin trimming the balance sheet as early as the June Fed meeting--perfectly in line with our previous assumptions. Stocks and bonds get a bit cranky when the Fed yanks the proverbial punch bowl away--even if they knew it was coming. Fortunately, they'd prepared quite well for this week in terms of trading levels. Sure, there was a bit of a volatile reaction at first, but the next 2 days of trading confirm that the Fed didn't truly surprise the market (i.e. volatile trading with rates and stocks ultimately making it back near pre-Fed levels). In the slightly bigger picture, we can see the damage that's already been done (and the possibility that big stock losses have helped rates avoid bigger spikes).
How Meaningful is Post-Fed Rate Resilience?
2 days, 2 rallies following Wednesday's Fed-induced selling spree. Is this a sign of bigger-picture ground holding potential? The short answer is "probably not, but anything's possible." The longer answer is in today's recap video.
Econ Data / Events
Fed MBS Buying 10am, 11:30am, 1pm
Core PCE Inflation y/y ......4.9 vs 4.8 f'cast, 4.7 prev Employment Cost Index.....1.0 vs 1.2 f'cast, 1.3 prev Consumer Sentiment .........67.2 vs 68.7 f'cast, 68.8 prev
Market Movement Recap
08:36 AM Weaker overnight, more so in Europe. 10yr was 4bps higher at the open, but half the losses are erased after the 8:30am econ data (no inflationary whammies). Currently up 2bps at 1.823 and MBS down an eighth of a point at 101.875.
12:23 PM Nice little rally starting at 9:30am. Bonds now in positive territory. 10yr down 2bps at 1.784 and 3.0 coupons up 3 ticks (0.09).
02:49 PM Close enough to the best levels of the day to say bonds are hitting the 3pm close at their best levels of the day. VERY calm trading session after AM rally. Treasuries mostly flat since 11am. MBS edging just slightly stronger. 10yr yield down 2.5bps to 1.778. UMBS 3.0 up just over an eighth of a point.
Bonds lost ground steadily in the overnight session, but are turning green in early trading on Friday. Once again, the 9:30am NYSE opening bell emerges as a jumping off point for bond momentum. This could be driven by month-end asset allocation trading or simply improved liquidity and new traders entering the market for the day.
Either way, our discussion question is the same as yesterday: what do we make of friendly bond bounces against the backdrop of the recent rate spike?
It's worth remembering that rates have been trending higher, in general, since August 2020 and that the most recent departure isn't as big as the one seen in early 2021.
Think you won’t be impacted by anti-U.S. sentiment in Russia? Think again. The Cybersecurity and Infrastructure Security Agency (CISA) issued two alerts to all U.S. companies addressing risks from Russian sponsored cyber threats and highlighted that recent cyber incidents in Ukraine contain similar destructive malware deployed previously: Understanding and Mitigating Russian State-Sponsored Cyber Threats to U.S. Critical Infrastructure and CISA Insights: Implement Cybersecurity Measures Now to Protect Against Potential Critical Threats. A wise old loan officer once told me, “Poor salespeople talk themselves into failure, good salespeople talk themselves into success.” She has since retired. Yes, people retire from our industry, and here’s a very short, humorous girlboss comment mentioning retirement. There is definitely some new blood entering our business, which is good to see. Different age groups have different priorities and have different trivia. Someone who is 25 doesn’t care who made up the Jackson 5, and someone who is 55 doesn’t care who the character SpongeBob SquarePants’ neighbor is. Do your MLOs match the demographic of the borrower you’re trying to attract? Is a 32-year-old first-time home buyer going to want to use a 69-year-old originator sticking around for one more refi boom, or will the buyer prefer to use a 39-year-old originator who is competent and trained on the latest technology? (Today’s audio version of the commentary is available here and this week’s is sponsored by TMS, a top 10 subservicer with a 98 percent customer satisfaction rate. TMS is on a mission to “Grow Happiness” and delivers next level service with their award-winning proprietary technology, SIME. Today’s features Interview with Josip Rupena, Founder and CEO of Milo, a financial technology company that offers home loans to global and crypto consumers.)
What do we Make of Today's Bond Bounce?
After a big sell-off in response to yesterday's Fed announcement, bonds rallied back today. The gains were slow and steady at first, but the pace quickened at 9:30am (a popular time of day for increased momentum in bonds, even though it's the NYSE open). Data was overlooked and 10yr yields ultimately made it down to the 1.80% technical level (adjusted to 1.795 today to better fit the intraday bounces), but were unable to sustain a breakout. As such, we are left with the possibility that today was another day in the ongoing rising-rate consolidation process (one that just happened to be green) even though the rate bulls are hoping it helps build a case for support at recent ceilings.
Econ Data / Events
Fed MBS Buying 10am, 11:30am, 1pm
Durable Goods......... -0.9 vs -0.5 f'cast, 3.2 prev GDP, Q4, advance..... 6.9 vs 5.5 f'cast, 2.3 prev Jobless Claims ..........260k vs 260k f'cast, 290k prev
Market Movement Recap
08:47 AM Surprisingly stable considering yesterday's events and moderately stronger by the domestic open. 10yr down 4bps at 1.832 and 3.0 UMBS up an eighth of a point.
11:19 AM Additional gains into the 10am hour, but backing away from a technical breakthrough now. 10yr bounced at 1.795, now "only" down 6.6 bps at 1.807. MBS up just over a quarter point.
01:03 PM Respectable 7yr auction stats despite intraday bond rally. No major reaction though. 10yr down 8bps at 1.792 and MBS up 10 ticks (.31).
03:08 PM yields retreated back above the 1.80% pivot point by the 3pm CME close (currently 1.814%). MBS are a quarter point higher on the day, but also off their best levels.
Overheard in the hallway: “My email got hacked again. That’s now the third time I’ve had to rename the cat.” But there’s a lot of other conversation and session topics here in the hallways at the IMB in Nashville. Discussion about the rapidity of the Federal Reserve’s moves in attempting to combat inflation, and how might those moves actually eventually push rates back down if they dampen the economy. How volume and margin projections for 2022 are changing the minds of lenders, potentially turning them into sellers. The impact of Experian Go: a free, first-of-its-kind program designed to help credit invisibles begin building credit on their own terms. The continuing shift by employees, and the mangers managing them, in hybrid work-from-home arrangements. Trends in signing and retention bonuses. (The STRATMOR Group has a compensation survey, as does the MBA’s Compensation Survey.) Conventional servicing multiples up to 5x1! Conventional forbearances are way down, but Ginnie forbearances are still troubling and will take a while to work out. Along those lines, today’s audio version of the commentary is available here and this week’s is sponsored by TMS, a top 10 subservicer with a 98 percent customer satisfaction rate. TMS is on a mission to “Grow Happiness” and delivers next level service with their award-winning proprietary technology, SIME. Today’s features an interview with me regarding news from the Fed and the IMB Conference in Nashville.) Lender and broker products & services
CoreLogic reports it saw the incidence of mortgage fraud soar 37 percent last year. The fraud risk had declined through most of 2019 and 2020 but is now back near pre-pandemic levels. Molly Boesel, CoreLogic’s principal economist, said the increase was principally driven by the increasing numbers of purchase applications relative to those for refinancing. Purchase transactions have higher fraud risk than refinances because there are “ more parties involved, more commissions, and more motives to make the deal work,” she said. In the case of a purchase, mortgage proceeds aren’t just moving from one bank to another to lower an interest rate as is the case with most refinances. A greater share of purchase mortgages means increases in transaction fraud risk. The report said this includes situations like straw borrowers and falsified down payments. The current rate of application fraud is estimated at about 1 in 120 loans. However, with purchase loans the fraud risk is estimated at one case in 90 applications. “It becomes a more concerning 1 in 23 if we only look at investment purchases,” Boesel said. Transaction fraud risk, which CoreLogic measures for purchases, had the largest increase at 34 percent. The wholesale channels showed much more risk than did those for retail or correspondent lending. Property fraud risk had the largest decline, at 5 percent overall. The company said this makes sense given the strong price gains and high demand of the last year.
Freddie Mac reported this week that its total mortgage portfolio increased at an annualized rate of 13.1 percent in December compared to a 12.0 percent gain in November. The portfolio balance at the end of the period was $3.246 trillion compared to $3.211 trillion the prior month and $2.784 trillion a year earlier. Purchases and Issuances dipped to $94.089 billion from $94.635 billion the prior month and Sales were ($1.467) billion compared to ($503) billion. Over the course of the year Freddie Mac purchased $1.299 trillion in loans. Single-family refinance loan purchase and guarantee volume was $48.4 billion in December compared to $52.7 billion in November, representing a 58 percent share of total single-family mortgage portfolio purchases and issuances, down from 60 percent in November. Purchases in Freddie Mac’s Mortgage Related Investments Portfolio totaled $59.468 billion for the month compared to $58.028 billion during the prior period. Liquidations were ($1.194) billion and ($1.109) billion for December and November, respectively and Sales for the two periods were ($53.373) and ($63.350) billion. The ending balance in the portfolio was $111011 billion, compared to $106.110 billion in November and $182.184 billion in December 2020. The annualized growth of the Mortgage Related Investments portfolio was 55.4 percent compared to a loss of (68.6) percent in November and a (67.0) loss a year earlier
Stocks and bonds both sold off in response to yesterday's Fed events. Stocks weakened a bit more in the overnight session, but have been bouncing back swiftly since 2am. Treasuries started out slightly stronger and have steadily improved into domestic hours. Less than 2 hours into the US trading day and a majority of yesterday's weakness is already erased. Is this just another 1 step forward after 2 steps back or is it possible that sellers are losing their faith?
Zooming out to a wider field of view changes the takeaway to some extent. It makes more of a case for markets leveling off after weakness without looking quite as optimistic. Stocks look like they have some bounce potential here, but bonds look like they're still consolidating in a higher rate range.
Consolidation could actually be a victory for bonds, as it would at least put an end to the trend we've seen so far in January. In order to make a case for a bigger-picture consolidation pattern, yields would need to break below 1.80 and make some progress toward the lower yellow line. 1.80 is offering some resistance so far today, but we're close.
While I'm not a huge fan of constructing probabilities from technical studies, we can also consider the potential momentum shift suggested by technicals. It also happens to line up reasonably well with the late September sell-off (to which we've compared the current sell-off on several occasions).
The last chart is submitted without (much) comment, but I thought it was somewhat interesting to see an emerging disconnect between rate hike expectations and the long end of the yield curve. This is entirely in line with the flattening trend seen on the dashboard (i.e. 2yr yields are higher on the day, but 10yr yields are lower).
Pending home sales fell for the second month in December and are finishing up the year well below their December 2020 level. The National Association of Realtors® (NAR) said its Pending Home Sale Index (PHSI) was down 3.8 percent from November and is 6.9 percent below its level at the end of the prior year. Pending sales had declined 2.2 percent in November. The PHSI, which is based on signed contracts for the purchase of pre-owned single-family houses, townhomes, condos, and cooperative apartments, dipped from 122.4 in November to 117.7. An index of 100 is equal to the level of contract activity in 2001. Analysts polled by Econoday had expected the index to rise 0.6 percent. Those polled for Trading Economics were closer to the mark with a consensus of an 0.2 percent decline. It was an unusually large gap between the two forecasts which are typically nearly identical. [pendinghomesdata] “Pending home sales faded toward the end of 2021, as a diminished housing supply offered consumers very few options,” said Lawrence Yun, NAR’s chief economist. “Mortgage rates have climbed steadily the last several weeks, which unfortunately will ultimately push aside marginal buyers.” Even with December’s slowdown in transactions, Yun says last year was an overall great period for housing in terms of sales and price appreciation . “The market will likely endure a minor reduction in sales as mortgage rates continue to edge higher,” he added. He forecasts the 30-year fixed mortgage rate to jump to 3.9 percent by the fourth quarter.