This is Matt Graham with the MBS Live Market Update. The Iran war has obviously dominated most of the trading since March first and really put economic data and inflation in the back seat in terms of market movement potential. But that began to change with the most recent jobs report, and it changed even more with last week’s Fed announcement. Rates started the week on solid footing as prospects for the peace deal with Iran continued to materialize, but then experienced significant volatility on Wednesday following the Fed announcement. With this being the first Fed meeting with new chair Kevin Warsh, one might consider that he had something to do with this, but really it had much more to do with the dot plot. What’s the dot plot? That is a chart in the Fed Summary of Economic Projections that conveys where each Fed member sees the Fed funds rate at various points in the future. It is represented in dot plot format, and so people just refer to it as the dots. That only comes out four meetings out of the eight meetings a year, and June is one of those meetings. The last dot plot suggested that the Fed was likely to either hold rates steady or cut rates by the end of the year, and the market was actually pricing in the likelihood of two rate cuts by the end of the year. The dot plot that came out last week suggested that Fed members now see the Fed at the very least holding rates steady and probably hiking rates at least one time and maybe two times. That led the market to immediately reprice Fed rate expectations from two rate cuts to two rate hikes. In fact, the two rate hike thing was already priced in at times quite a bit, but it surged in likelihood after Wednesday’s dot plot, and it hasn’t really come down since then. How did Warsh come into play? Opinions were divided over how he handled the first press conference, with some really praising the performance and others saying it caused problems. But let’s avoid speculation and focus on the facts. Contrary to many expectations, he definitely didn’t come across like a shill for cutting rates without any justification. In fact, he didn’t really comment on where rates should go at all. He really pushed back on the idea of forward guidance. Just as important was the fact that he didn’t push back on the Fed’s own hawkish messaging from the dot plot. It’s a little different from how Fed Chair Powell used to do things. If we had a dot plot that really caused market drama or painted an obviously lopsided picture in favor of lower or higher rates, Fed Chair Powell would often try to add some nuance to that and push back in the other direction to mitigate market volatility and balance the takeaway. Warsh didn’t do that at all, although he did say that the dot plot was written in pencil, not in pen, and not to put too much emphasis in it, and that is the same way Powell would have referred to the dot plot. Some said that Warsh’s refusal to engage reporters on any form of forward guidance deprived the market of its ability to further refine its understanding of how the Fed might react to incoming data over the next six weeks. And some argued that could add uncertainty that demanded a higher risk premium. In other words Bond yields have to go higher because we’re less certain about how they should react to things. How’d that all shake out? It wasn’t too bad, honestly. By Thursday, much of the damage was undone in longer-term rates, and mortgages were able to recover more than half of what they lost on Wednesday, and they didn’t lose that much on Wednesday to begin with. The damage that remains really shows up in the shortest-term rates, like Fed funds futures, obviously, and short-term T-bills. Mortgages have a longer implied duration than those, so that’s why they didn’t get hit as hard. Coming up next, we have Iran war updates remaining important. While the memo is signed, the official peace has yet to be confirmed. When that happens, and especially if oil prices continue to behave, rates could see slow and steady additional benefits. But the beginning of the week so far casts some doubt on that because oil prices have fallen back to last week’s lows, but bond yields are still quite a bit higher than they were before the Fed announcement. There is no overt reason for that. We had an overt reason for them rising in the overnight session because they were getting caught up to a big sell-off in Europe that happened on Friday. But even European yields have declined, so we have oil prices and European yields suggesting that US yields could move lower, but they’re not. So we’re left really with conjecture, things like concessionary selling ahead of this week’s Treasury auction cycle or asset allocation trading as traders rotate out of bonds and into stocks. Either way, we’ll be able to clear that stuff up later in the week when economic data like PCE comes out and when the auction cycle wraps up on Thursday. 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.