Market Update: PCE Release on Friday and General Market Update
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 19th and October 25th, 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