Market Update: 10 Yr Treasury Breached 4.40 overnight after a shrug off of Fed Statement

Hello All,

The market has ignored the Fed Statement in large part and is beginning to take the statement as ‘lip service” as this point.  It would not be wise for the Feds to not maintain the tool of a raise due to the likely market reaction if they removed it. 

So, for the foreseeable future, until there is actual “lag data” to show we are in a recession, or a material jump in jobless claims and subsequently, unemployment rates, the Feds will maintain this hawkish tone.  However, at this moment in time with the current data, the market is not buying it and believes at this point there is next to zero chance for an additional raise and is believing we will see cuts sooner than later. 

I would not be ready to declare this battle over, because data can reverse.  However, the market is back to trading fundamentals and the fundamentals show material cracks.

The 10 yr is at 4.37 as I write this, down 5 BPS from close yesterday.  In addition, the MBS (mortgage rates) have benefited from the narrowing of spreads between the 10yr/5yr blend and 30 yr mortgage rates.  This was approaching +200 BPS a few weeks back and this morning it was down to +156 BPS.  That is essentially 44 BPS of market improvement in price for mortgages gained up and above the downward movement in the yields on the treasuries themselves. 

It appears by the decrease in Shelter costs that is lagging by several months, we could be getting close to CORE inflation down in the low 2% range.  However, that data lags and the Feds are not using lead indicators, they are right now only looking at lagging data.  By doing so, it is near certain they will overshoot the 2% CORE or move the country into a recession for some period trying.

I do have some concerns that there is pent up demand in housing that when rates come down some of the shelter indicators around the “rent equivalent” could cause the shelter data to reverse and potentially create a rebound situation for CORE. 

Headline in large part will be at the mercy of energy prices and if they stay down, we will likely be in good shape.  I would expect some plan to be laid out with candidates on both sides of the boxing ring to have a plan for energy independence.  We would be nuts as a country to not make this a focus along with the balancing of a budget and fixing one of the worse ran businesses in the world, the US Govt.  Any other business that has run as inefficient and unprofitable as the US Govt would be out of business.  I sure hope that candidates emerge in all parties, including independent parties, with a core focus on balancing the US budget, decreasing the national debt, and becoming energy independent through both oil drilling and green measures.  There is no reason the entire US should not be aligned on these items.

Some good news coming ahead of a long weekend… At this point things appear to be back tracking fundamentals, which is good.  Mondays after a long weekend with the growing geopolitical risks and the fact that our market is the only one closed in the world could be very volatile.  We could see a retraction, or another gain… We will have to see what occurs while we are on break, but just wanted to point out that Monday could have big swings as a result.

Happy Thanksgiving everyone. 

Josh Erskine 

Chief Executive Officer

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