This is Matt Graham with the MBS Live Market Update. Last week was a very interesting one for the bond market with several moving pieces and at least one dark horse coming up around the outside to create a bunch of market movement for reasons that not many people in the US we’re aware of it all began with economic data on Monday morning. ISM manufacturing came in roughly in line with expectations at the headline level, but the underlying components were much weaker, including the employment component and new orders. Thus, making markets a little bit concerned about a negative shift in economic data. In general, a negative shift in economic data is an ongoing concern. Google search prevalence for the word recession is going up fairly rapidly in the past week. And we’re seeing a high degree of correlation between stock prices and bond yields. The kind of thing that typically happens when the market is in a risk-off trading pattern investors seeking safer havens in the bond market and moving out of riskier assets like stocks. Indeed, that pattern on charts has been very prevalent over the past few weeks. And noticeably it took a little bit of a break on Tuesday and Wednesday. This was due to the big dark horse market mover that not a lot of people in the U S are talking about but was fairly conclusive. If you’re looking at the global and it had to do with Europe, specifically Germany. Specifically, the new German government or likely chancellor throwing out an idea to get rid of Germany’s version of the debt ceiling in order to undertake some massive stimulus. And the implication there is that Germany would need to issue additional debt. Obviously, raising the debt ceiling means they would want to issue additional debt to pay for the stimulus. And Germany is historically incredibly fiscally conservative. So, this hit German sovereign debt, aka boons, very hard and made for the worst day in German boons, I believe in history. I’ll have to dig more on that, but that’s what the reports were saying, and it did spill over into U. S. Trading. It wasn’t as strong of a short-term correlation as we’ve often seen in German boons and U. S. Treasuries, but it was the only thing in terms of magnitude and timing that could possibly have accounted for. The reversal in the correlation between stocks and bonds domestically. So that pushed 10 year yields up from a floor of roughly 4.11 on Tuesday. And it got us all the way up to roughly 4.34 by Thursday morning and that’s where bonds found support. Then on Friday, the big jobs report was fairly mixed. The headline level was higher than a lot of traders were worried about, and that created a very brief moment of selling in the bond market. But the internal components were a bit weaker, especially the unemployment rate when factored against the labor force participation rate, and that pushed yields back down, ultimately making for a very uneventful AM session on Friday for a jobs report day. The afternoon’s big market mover was a speech from Fed chair Powell in which he said they’re not worried about the economy and it doesn’t need the Fed to do anything, really, quote unquote and that precipitated some fairly rapid selling and stocks were bouncing at the same time. And that was that for the week yields ended up not making it quite as high as they were the previous day. So a little bit of hope from a technical standpoint going into the weekend and then over the weekend, President trump was asked if a recession was in the cards and he said, although he hates to predict such things, this is a period of transition because they’re trying to do very big things. And so by not pushing back on the notion of a recession and taken in conjunction with other comments from other government officials it seems that at the very least, the administration is willing to let the economy undergo a period of If it’s not contraction, at least some strain in order to work toward broader goals, and that would be consistent with the same trading pattern. We’re seeing weaker stocks, stronger bonds, and it really is just going to be tweaked by economic data from that point on. Speaking of economic data, this week’s biggest ticket is the consumer price index Wednesday morning. That is the biggest. Of the early inflation reports and is expected to come in at 0.3 at the core level versus 0.4. Previously, if it’s any lower than that, bonds should find even more reason to rally. And if it’s 0. 4 or higher bonds should move back up toward their recent ceilings. That’s going to 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.