This is Matt Graham with the MBS Live Market Update. Last week was certainly a volatile one for the bond market with 10 year treasury yields rising in week over week terms at one of the fastest paces in the past several years. There have definitely been worse episodes of volatility and there are definitely ways to view that through a less dire lens. For instance, if we were to throw out the past two weeks and just look at where yields are this morning, or even on Friday, we could say that the gradual selling that had begun in early March simply is continuing at a reasonably moderate pace and that would render the last two weeks, just an unfortunate episode of significant volatility. We don’t really know how everything’s going to play out at this point because tariff policies seem to be a little bit fickle depending on what’s being announced on any given day. Case in point, last Wednesday there was the update that provided a 90 day pause on the previously announced tariff implementation. Stock market caught a huge break on that and rallied significantly offsetting many of the previous losses. Bonds also rallied, but those moves reversed in the following days and yields ended the week at the highest levels in several months, stocks also moved back down toward lower levels and this has to do with the laundry list of reasons that we discussed last week, but I’ll run you through them really quick. We can talk about carry trade de-leveraging, which is an esoteric concept that you don’t necessarily need to understand other than. It applies to very highly leveraged trades that take advantage of small differences between cash and treasury futures contracts and as volatility or weakness hits, those carry trades can rapidly deleverage resulting in forced selling of cash treasuries and that was said by many to be a key ingredient in the selloff last week. It was also said by a few to be not so big of an ingredient. So, I think we’d classify that as a possibility. Number two, simple concept of raising cash for trades, other trades besides treasuries for selling treasuries, pushing yields up. We might be needing cash to take advantage of new trading opportunities created by all the volatility. We might be needing cash for tax payments or simply to move to the sidelines amid an episode of uncertainty on a more conceptual note for the third little point here, we can talk about treasury issuance implications of all of the news that’s happening and just as one example, if tariffs had been seen to create a lot of treasury revenue as initially announced, then economists and whoever else gets a hold of these ideas and starts to consider what the impact on trade is going to be and then we sprinkle in the exemptions and pauses. Then treasury revenue looks a little bit different than it did before and implies increased treasury issuance because as we know, this, administration will not be keen to raise taxes in order to increase fiscal revenue and if we’re not raising taxes, then that revenue generally needs to come from something like issuing more treasury debt if tariffs aren’t generating as much revenue as initially anticipated. To be clear, this isn’t saying that we won’t see a revenue increase from tariffs. It is more a question of what will the actual revenue be versus the anticipated revenue increase. One other sort of sneaky problem for the long end of the bond market, IE 10 year treasury yields and other things that are more correlated with mortgage rates is the yield curve. We’ve had fed rate cut expectations helping to lock down two year treasury yields because they correlate more with fed funds expectations, that means any bond market weakness that has had to be endured must play out in the long end of the yield curve and that makes 10 year treasuries rise faster than two year treasuries. All of the things being equal and it hurts mortgage rates a little bit more than we would otherwise see dollar devaluation is something that some people have mentioned as a potential contributor to general bond market weakness. I don’t have a strong opinion on that and I’m not an expert in Forex, but we can see that the dollar has weakened against a foreign basket of currencies since April 2nd, at a fairly quick pace and that can correlate with decreased bond market demand. We’ll leave that point at that one. Additional contributor to last week’s treasury market weakness was the approval of the budget framework that paves the way. For a spending bill and the fact that it left out 1.5 trillion in spending cuts that were instead promised by the Speaker of the House and the Senate majority leader as something that they would find room for in the future bill and the bond market didn’t necessarily care for that because there too, it implies potential risk of increased treasury issuance in the future. Heading into the new week. We had news over the weekend that certain items would be excluded from the full brunt of the new tariffs, leaving them at only the 20% tariff and this included things in the semiconductor industry and other tech related things. There are several classifications under the harmonized tariff agreement that show what those items will be but the market liked it. Stock market liked it, bonds liked it even more. Stocks are correcting a little bit this morning, but in general, both stocks and bonds are tending to favor developments that make the tariff implementation not quite as aggressive as initially announced. Headlines will undoubtedly continue to come out this week. Economic data is not so heady. We do have early close on Thursday and a full holiday closure on Friday. So, many people are looking to next week to get a cleaner read on where we stand after all the drama. But we will get retail sales on Wednesday and a couple of second tier reports between now and then apart from that, all eyes are on fiscal headlines and tariff related developments and international response to gauge the day-to-day, moment to moment trading reaction. 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.