This is Matt Graham with the MBS Live market update. Last week ended up being all about geopolitical tensions in Iran with oil prices leading the way higher for bond yields, although not in a perfectly correlated way out of the gate, yields were higher. We talked about this on Monday morning last week, and said that it was up for debate as to how much of that was due to oil prices and how much was due to new month trading as the changeover from excess demand at the end of the previous month can sometimes give way to excess selling at the beginning of a new month. But as the week progressed, it became more and more clear that bonds were indeed pricing in some inflation implications from the ramp in oil prices. That said, anytime we looked over the shortest time horizons, that correlation was not playing out in a well-behaved fashion. The biggest question was whether the week’s hefty slate of economic data would have much of an impact in light of our attention being pulled to other places and the answer was sort of, we had ISM manufacturing on Monday, and this actually gave us some hope that we would see a reaction to data because that report was only modestly stronger than expected. But there was definitely a little bit of a reaction in the bond market. But then on Wednesday when we had ISM services, definitely a bigger market mover on average than ISM manufacturing, it did not have a big reaction in bonds and neither did a DP employment that came out earlier the same morning. Both reports were stronger than expected, but neither caused any significant selling in the bond market, really no detectable selling in the bond market. Then we figured it would be up to Friday’s jobs report where we would certainly have to have a reaction if the numbers fell far from expectations. Not only did they do that, but they fell farther from expectations than any other jobs report in more than a year, coming in at negative 92,000 versus a positive 59,000 forecast. Definitely a huge miss. Not the biggest ever seen, but one of the biggest ones in the past few years and we would assume that the bond market would rally on that, and it did so for a few minutes and then turned around and began to sell off. Puzzlingly. We didn’t even have any other justification for the sell off at that time. And the unemployment rate is not the reason that we were selling off. That also rose 4.4 versus a 4.3 forecast. It was simply a weak jobs report and the only ways to reconcile the selling would be to consider the bond market is preoccupied with inflation implications from the conflict in the Middle East or that there was some significant curve trading going on with the short end of the yield curve, benefiting from ramped up bets in fed rate, cuts in near term meetings. Sometimes that can pull money out of the long end and create the appearance of excess weakness in treasuries even though the shorter end of the yield curve is doing a bit better. That said the short end of the yield curve wasn’t doing that much better than the long end of the yield curve at that time. So we’d have to probably fall back on Iran stuff again. Then over the weekend, a huge spike in oil prices and definitely correlation with higher treasury yields. But another opportunity to view that disconnection in terms of the correlation because while bond yields and oil prices did move the same direction, bond yields didn’t go any higher than they were on Friday morning. Even though oil prices absolutely soared relative to where they were on Friday morning, as the new week progresses, we’ll have to assume that there will be continued focus on that stuff. That stuff being oil prices and other knock on effects from the conflict in the Middle East, that can take the form of flight to safety trading due to liquidation in equities markets, which can offset the negative implications from higher oil prices and probably more. Opportunity for the bond market to ignore economic data, which is not quite as relevant this week as it was last week. Although we will get CPI on Wednesday, which is arguably interesting in light of ramped up inflation considerations. But then we need to remember that report is for February. It won’t really mean much because market participants will assume that increases in fuel costs will flow through to the inflation data that comes out in the coming months. The impact of all this on mortgage rates is as you’d expect, they are higher and at the highest levels in several weeks. It’s hard to see what would justify a quick return back to recent lows as long as the fighting with Iran continues. 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.