This is Matt Graham with the MBS Live Market Update. Last week brought two key events in the form of jolts job openings and labor turnover survey. And of course, the big Fed day jolts was mixed with modestly hired job openings. And the more interesting development was the big drop in the quit rate. These are people that are voluntarily exiting the workforce and in general, the lower the quits number, the worse it is for the labor market. That helped offset the slightly higher job openings number and prevented a more serious sell off in the bond market on Tuesday. Ultimately, it was fairly tolerable and rates were back in a pre-jolts range by Wednesday’s fed announcement. The Fed announcement itself had many moving parts. First off, the rate cut was entirely priced in and had no impact on the market, and even then, any reaction at 2:00 PM would have been easier to attribute to the DOT plot, which is the chart that the Fed puts out on every other meeting that details each Fed member’s view on the appropriate level of the Fed funds rate at various points in the future. In other words, it’s the Fed funds rate forecast for each Fed member. There was some cause for concern that the dots would be creeping higher due to recent fed speeches where members sort of expressed second thoughts about the pace of the rate cut path, but the dots ended up being fairly unchanged from the previous version with the median targets at the end of the next two years staying unchanged, that wasn’t worth a huge reaction in the bond market, but it was modestly positive at first. Then at 2:30, fed Share Powell’s Press conference didn’t do anything else to spook the market, and traders generally liked the fact that he referred to the current level of the Fed funds rate as being at the high end of the neutral range. Neutral is a bit of a moving target. It is a theoretical fed funds rate that neither adds nor subtracts to economic strength, specifically in the form of a strong labor market and price stability. And if we’re in the high end of that range, that means that there’s room for another rate cut, maybe two, maybe three, depending on how things go in the coming months and years. That’s consistent with what the DOT plot shows. One more rate cut in 2026 and perhaps another one in 2027. Although by the time we’re considering decisions that far out, it has less of an impact on how bonds are trading today. The other significant development was the Fed’s announcement of reserve management purchases. This means that the Fed will be buying bonds again. And not just reinvesting as they already have been doing. So when the Fed says they’re buying bonds, that causes a lot of confusion with the notion of QE or quantitative easing. But the two should not be confused. QE is a fire hose. That force feeds the market with liquidity in an attempt to force lenders to move out the curve with lower and lower rates, thereby providing a stimulative effect. By comparison, reserve management purchases account for a mere trickle. Even though we’re talking about fairly big numbers in terms of the bond buying that was announced, and that trickle is intended not to add liquidity to the market, but to prevent an undue loss of liquidity, thereby preventing unnecessary rate spikes, and especially. Unnecessary volatility as seen in the 2019 flash crash largely attributed to that type of loss of liquidity. The most important thing to understand about RMP Reserve management purchases is that it was widely expected and very well telegraphed by the Fed. We knew that it would be happening as the overnight reverse repurchase facility was drawn down, and that’s exactly what’s happened. It was not a big deal for the bond market. If it had been, we would’ve seen. A bigger move right at 2:00 PM when it was announced alongside the rate cut and the DOT plot. Perhaps the most important thing to know about last week’s fed festivities is that by Friday afternoon, any movement that was seen after the Fed was completely priced back out of the market. With that attention turns to this week’s key events, which will be the jobs report coming out tomorrow morning. This is the first newly collected BLS employment data. For the month of November, which the bond market will be very grateful to receive. Two days later, we will get more freshly collected BLS data in the form of the consumer price index or CPI for November. If these two reports sing the same tune with. The jobs market looking stronger and inflation looking higher, it could easily push yields up and out of the narrow range that they’ve been in for the past three months. Call that 4.0 to 4.2 in terms of 10 year yields. And conversely, if the reports are unified with a gloomier economic message, lower jobs, lower inflation, it would likely result in yields moving back down toward the lower end of that range, but it would be a tall order to break fully below it. 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 MBS Live!
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.