We start the day with the 10 yr treasury index at 3.88.  Very early this morning it was approaching 3.86 in the overnight session.  Just 7-8 weeks ago between October 19^th and October 25^th, we were up over 5.00.  In addition, at that time, the spread between the 30 yr fixed and the 10 yr / 5 yr treasury blend (split the two) was as wide as 192 BPS and approaching 200 BPS.  That meant that the avg. 30 yr fixed being made in the market was 192 BPS higher than the 10 yr and 5 yr treasury blend.  Historically, 30 yr fixed rates are 90 BPS over the 10 yr / 5 yr blend.  Long term interest rates go up faster when the spread widens.

Since then, we have seen VERY MATERIAL positive market movement with rates improving.  We went from 8% rates just 7-8 weeks ago to rates back in the 6’s today.  In both cases the borrower is still paying points at close.  That shift in the market that does not look to be changing anytime soon as the market price investors are willing to pay for the securities is way lower than that of more normal years of the past.  The days of borrowers receiving material credits at close to cover expenses from the lender have been over for almost 2 years.  This may come back to more normal times, but it will not happen until volatility in either direction reduces drastically.  Investors are going to need to see a stable market to begin to bid up prices and will need to see borrowing costs come down materially. 

I talked about the wide spreads of the 30 yr MBS over the 10 yr / 5 yr blend above.  In addition to rates getting the benefit of the 115-120 BPS in drop in the 10 yr treasury, that equated to around 300 – 500 BPS in price improvement in the price of a 30 yr fixed mortgage-backed security (“MBS”), the market has also benefitted from the narrowing of the spread to 143 BPS as of this morning.  That is effectively rates improving by almost 50 BPS without market movement.  Meaning the price of the MBS improved by 50 BPS relative to the 10 yr / 5 yr blend. 

We are heading into a holiday break and light trading.  As a result, light trading can increase volatility.  Now that we have broken through 3.90, if we see a miss tomorrow on the Philadelphia Fed Index to the worse, which is the index whereby manufacturers that report in the PA, NJ and DE areas report activity, we could see a run at the 3.75 level on the 10 yr and see rates improve by another 35 – 50 BPS.  This will likely take a slowdown that is over -5.0.  The market expects a 3.0 print. 

The market is showing “bullish” momentum currently.  It can shift overnight, but it feels like the market wants to see a little bit more to make this run.  The Auctions shown below show demand, and if demand is week on the 20 yr, that will work against the current momentum. 

Friday is the Fed’s favorite inflation index, PCE.  In addition, that report provides wage inflation numbers, that need to slowdown for the inflation narrative to continue to be positive.  The market is expecting a .2% increase in CORE on Friday.  That is a 2.4% annual PCE rate if annualized and close to the Fed’s target.  That will put the trailing 12 rate in the 4% range, which is not yet where the Fed’s want this to be.  But when looking at a shorter trailing period, we are getting closer. 

If we see a .0% read or even possibly.1%, the 3.70’s for 10 yr is I would think close to guaranteed if the other data this week does not conflict. 

If we miss high, we will likely retrace back towards 4.00.

Bottom line is there is light showing and we are optimistic that we will see a much better Q2 on in 2024 than we saw this year. 

Josh Erskine 

Chief Executive Officer

CalCon Mutual Mortgage LLC dba OneTrust Home Loans
Yellowstone RE Holdings LLC
Yellowstone Global Investments LLC

Hello All,

The first bit of data from an action-packed employment numbers week was positive for rates. 

We are starting to see the pivot that over the last 60 days that we talked about occurring once the market felt the hiking was over.  Investors would run at locking up these yields once they safely felt there would be no more hikes.   Yields should not have reached 5.02 on the 10 yr in what I felt was the 8^th / 9^th inning of a rate cycle for the last 90 days.  It shows the power of media.  Some big players take short positions on the long end of the curve (long term treasuries) and the narrative gets out of control in the market around data that was lightly supported in the market.  The market has lost their mind on remembering that Fed raises take time to get into the market and that is what we are seeing.  We are VERY RESTRICTIVE at this point and have been for some time.  The speed of the hikes was unprecedented.  We have seen the impacts of far too open monetary policy and a government that used a shotgun to do the job of a pellet gun during COVID and a Fed that sat on their hand calling the impacts “transitionary” for far too long before they realized we had a big problem not only in the US, but worldwide.  It is very hard to correct the amount of money that went into the market, and the subsequent velocity of money in the system dragging this out much longer than people expected, however, there are very clear signs we have entered, the top of the 9^th inning and may not see the bottom of the 9^th for those of you that understand baseball. 

I have been saying since the last hike that I don’t think the Feds can get another hike into the system and still stand by that.  If they did get one in, it would have just increased the negative impacts that will now occur from all of this.  They are simply trying to talk strong to not have the markets go too crazy leading to a reversal of the momentum of inflation once we enter the “sit and wait period” and eventually rate decreases.  I do have concerns on the strength in equities right now, but I think that will start to behave more inversely here as investors take their returns for the year that were unexpected entering the year and more waiting it out to see how bad things get. 

An important thing to note is the Fed’s WILL NOT wait until their target is hit, which they are currently steadfast on the 2% CORE rate, before they begin to cut.  Why?  Well, it is relatively simple, if they waited until we were at target, then we would far overshoot that target.  They must now determine at what points in time they will implement cuts to not “overshoot the runway on the landing”.  In nearly all cases the Fed’s create a pendulum and it swings from one side to the other, so there is no reason to be optimistic that they will get the timing right.  The good news is that is good for our industry, but not likely your 401k. 

What happened so far this week?  We FINALLY received positive inflation data and a week jobless claims report by market standards.  There was a slight revision to last weeks report upwards from 217k claims to 218k, however, the new claims for the week came in at 231k in claims.  This is new filings for unemployment.  We are not anywhere near the levels we need to see rates in the low to mid 6’s on rates, but it is enough for us all to see how fast the long end of the curve can reprice (10 yr treasury yields dropping) when this begins to align. 

Overnight we were under 4.40 on the 10 yr, it has come up to the 4.41 range before the markets are opening.  However, just a few weeks ago the media and many big names, who stand to benefit from this (i.e. Jamie Dimon) were talking about 6.00 yields on the 10 yr treasury.  Don’t let anyone kid you, Jamie Dimon is smart, but he too is an antagonist when it comes to these things because when things go to hell, he grows and picks up asset’s (including banks) at large discounts.  Everyone has an agenda.  Same thing goes for the large hedge funds that took short positions and then were very public on the narrative we would go through 5.5 on 10 yr yields but bailed on their trades at 5.00 after stirring up much of the media frenzy that created the path to 5.0 in the first place.  It surely was not driven on fundamentals. 

The market is about consumer confidence and momentum.  Only long-term investors (i.e. Warren Buffet) trade on fundamentals and look for companies and assets with the right fundamentals.  Short-term investors, including short sale investors, are playing less on fundamentals and more on momentum.  What better way to impact the markets than by BS media reports and headlines. 

Here is the summary of data released from the week below.

ACROSS THE BOARD IT IS NEGATIVE results.  This is the first week we have seen nearly every category in a bad spot and declining together.

Inflation drops, with PPI showing a BIG MISS.  PPI is wholesale prices and can be a better indicator on future than CPI because one can expect that to be earlier in the consumer curve on demand.  Meaning products are yet to be sold to consumers in the PPI numbers.  Those are the supplies that make the products or offer the services.  So again, a good early indicator. 

Retail sales down again, although not as much as the market expected, but still negative after a big miss last month. 

Philadelphia Fed Index is down materially, but not quite as much as the market expected, so more tamed results.  However, materially down.  This was a big drop for a month that is showing a slowdown in manufacturing in the greater Philadelphia market.  It could be caused though by all the Eagles fans skipping work to sit in circles and chant “E – A – G – L – E – S” to each other.  In my travels the past few weeks, including last night in Puerto Rico airport, I have had the pleasure too many times seeing adults act like they are a middle school cheerleading team chanting this to each other’s.  As a NY Giants fan that will openly admit to the Giants potentially could lose to a good college team this year, this bothering me as much as it does may be my distaste of Eagles.

Jobless claims came in 11k higher in addition to the 1k upward revision to previous month.  Also, ongoing claims continues to rise.

Homebuilder sentiment is way down at 34.  This is why we need to be out there talking to every homebuilder in the market to help solve the problems that is leading to this sentiment.  We have the tools.

Today we have housing starts, but the momentum in the market that has been created by the data the rest of the week even if yields pull back because of a consolidation today, has been good and has “stickiness” to it as it is based on fundamentals.  This week has still been a welcome run and the things that we have been saying for the last 45-60 days are starting to show in all the data.

The forward dot plot (when the Fed will raise or cut) expectations around Fed’s decision have moved cuts forward.  The market is now pricing in a full 1% drop in Fed’s fund rate in 2024, with the first one expected in May for 25 PS and 50 BPS in July.  Personally, I think they will make their first cut in February / March and they may not even get to the end of Q1 if negative momentum gains more steam, which it absolutely can.

Overall, a good week.  The big risk to all of this is a material rebound in inflation, and that is why the Fed’s will hold at these levels until there is more pain.  But market behaviors come down to consumer confidence, which drives their spending behavior.  Student loan payments kicked in last month which is also the month that on paper savings were depleted.  Wage growth needs to slow to fully get inflation controlled and that will occur.  When that occurs, the velocity of money, which is the speed by which you spend $1 and then the person you spend that $1 with then spends that same dollar somewhere else and so on.  Velocity can hold markets strong.  When velocity of money slows, which it will soon, markets will begin to get worse quicker.   Unsustainable wage growth creates this and when it slows things could come crashing down.

Josh Erskine 

Chief Executive Officer

CalCon Mutual Mortgage LLC dba OneTrust Home Loans
Yellowstone RE Holdings LLC
Yellowstone Global Investments LLC