This is Matt Graham with the MBS Live market update with the government shut down ongoing. Last week’s economic data calendar remained sparse, and that left a clear focus on Wednesday’s fed rate announcement and specifically at the press conference that followed it. More on that in a second. The beginning of the week actually did have some small considerations for bonds with a condensed treasury auction calendar. Typically, the auctions play out on Tuesday through Thursday of any given week, but. Due to calendar considerations, especially on month end weeks, that can be condensed as it was in last week’s case with all three auctions taking place on Monday and Tuesday. That’s quite a lot of dollar amount for the bond market to underwrite and it can create a little bit of a concession. IE prices on bonds can fall, yields can rise in advance of the auctions, and then some of that pressure can be relieved after the auctions are over. That was arguably the case with a little bit of weakness on Monday and Tuesday morning, and a little bit of a recovery on Tuesday afternoon. There was non-market moving data as well on Tuesday with the home price indices coming out from K Shiller and FHFA. They showed ongoing disinflation in housing or a slower pace of appreciation year over year. But in monthly terms, the FHFA numbers were stronger than expected at a 0.4% monthly pace. That’s somewhat relevant right now because we are waiting one more month to find out. What the quarterly increase in prices will be in order to determine the latest change in the conforming loan limit that will come out at the end of next month when the Q3 home price data is released. The expanded quarterly data series that’s used for the conforming loan limit isn’t exactly the same as the monthly figures that we got last Tuesday, but they. Tend to track fairly closely, and if we extrapolate what we already know from three quarters worth of the quarterly data with two months of the monthly data, the conforming loan limit is tracking to come in just somewhere north of 830 K. Again, not a market mover, but potentially interesting to market participants. That brings us to Fed Day. They cut rates as expected. It was 100% priced in and not at all a market mover. The Fed also ended QT or quantitative tightening. That’s the process that allowed them to let bonds roll off the balance sheet and not reinvest the proceeds back into the treasury market. Ending QT means they’re going to be buying more bonds than they were before, and some people view that as a defacto qe. In other words, quantitative easing or additional bond buying. But it’s important to understand that is not the case. The end of QT was widely expected to happen very soon, if not last week. Some firms came out and said it was definitely gonna happen last week. They ended up being right, and the flow of events here really goes like this. The overnight reverse repo operations at the Fed had been adding liquidity to treasuries because as the Fed. Paid overnight interest on treasuries lent to them by financial firms. That interest was subsequently reinvested into short term treasuries, adding liquidity to the treasury general account, and the financial system in general with the overnight reverse repo amounts drawing down to near zero. That meant a potential. Problem for liquidity in the short term and ending QT simply offsets that problem by allowing the Fed to buy a roughly comparable amount of bonds that is now missing from the end of the overnight reverse repo operation. In other words, it was a zero sum game for financial markets and not net. Bond buying in a new sense. That means the focus was entirely on the Fed’s press conference, where Fed Chair Powell had an opportunity to push back on the market’s expectations for another rate cut in December until last Wednesday. The market was pricing that in with a near 100% certainty, and Powell was pretty clear about not agreeing. He said a rate cut in December was not a foregone conclusion and quote unquote far from it when that comment came out. The bond market sold off fairly. Obviously it wasn’t an extreme sell off, but it was a little bit of an adjustment taking 10 year yields from just under 4% to roughly 4.08 by the end of that afternoon. There was a little bit of additional selling on Thursday morning, but we leveled off round 4.09 and didn’t deviate much from that for the rest of the week. Heading into the new week, we have a large corporate bond announcement from Alphabet. Putting a little bit of upward pressure on rates, but apart from that, there’s not much we can do besides wait for economic data to return when the shutdown ends and bonds are selling off just a little bit. Mostly in response to the alphabet bond announcement. ISM manufacturing data was slightly weak and helped slight recovery. But it didn’t really stick, and we are drifting around 4.11% into Monday afternoon. We will get a few other non-government reports as the week progresses with ISM, non-manufacturing being the most relevant of those on Wednesday morning at 10:00 AM That’s gonna do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
Matt began as an originator in 2002. He fell in love with the idea of following MBS in real-time but felt that existing products were only scratching the surface. Thus was born MBS Live in 2007, the first-of-its-kind platform with real-time market data/analysis, and live chat with analysts, traders, and originators around the country. He is currently the Founder and CEO of MBSLive!
He’s been covering bond/mortgage markets, writing commentary, alerts, and chatting with the live community every business hour of every business day ever since.
Matt also serves as the Chief of Operations for mortgagenewsdaily.com, where he is one of the industry’s most respected mortgage rate experts, frequently quoted in the media. Mortgage News Daily’s rate index is used as the definitive resource on day-to-day mortgage rate averages.
He lives in the Pacific Northwest with his wife and son where he enjoys skiing, fishing, coaching youth sports, playing the guitar, and more DIY projects/hobbies than he’d care to admit.