This is Matt Graham with the MBS Live Market Update. Volatility picked up last week and continues into the present week, largely surrounding developments on tariffs and trade. Last week, though kicked off with ISM non-manufacturing data, causing some weakness in the bond market. It came in a bit stronger than expected. Prices rose much higher than the previous month’s reading. It represented another ISM report that surprised traders who were expecting recent shifts in sentiment to spill over into the hard data in a more meaningful way. The following day, bonds caught a break with a stronger 10 year treasury auction, and that gives us a quick opportunity to talk about the differences between refunding and reopening auctions. That’s something that’s only a factor for tenors of 10 years or longer and it just refers to a new coupon being created once a quarter, and that happens during a refunding auction and then reopening auctions give traders another two chances on the subsequent two months to buy more of that same coupon. Those two types of auctions have distinctly different performance characteristics, and that’s something that’s not often appreciated among commentators, journalists, et cetera and it means that sometimes people are comparing apples to oranges when it comes to a given treasury auction. Stats versus past averages. The averages for reopening auctions will be better than those for refunding auctions. This one was a refunding auction and it was strong even compared to reopening auctions. Therefore, very strong compared to past refunding auctions. We could get into the weeds on exactly how those differences play out, but suffice it to save for those who like the letter grading system, if the reopening comparison made it seem like an A minus B plus type of auction comparing it to a refunding auction. It was a solid perhaps even an a plus and moving on to Wednesday, we had the Fed, fed Chair Powell, and the Fed announcement itself were never able to say anything new and different than what we had already heard. Pretty much every fed speaker say coming into it, which is that the mandates are intention. There are some aspects of policy that should promote weaker economic growth and other aspects that could promote higher prices and those two things put opposite. Forces on the expected Fed funds rate, and Powell basically repeated that concept 17 times after being asked the same question in 17 different ways by reporters.
At the end of the day, bonds weren’t any different than they were. Before the Fed announcement levels, and that was that moving on to Thursday, there was a UK US trade deal announced, and that had a negative impact on bonds, positive impact on stocks, not a huge trade relationship between those two countries, but it provided a proof of concept as to how other trade deals might look, and it gave officials an opportunity to reinforce the fact that a 10% tariff floor was going to remain in place as these trade negotiations happen with other countries, generally speaking, 10% isn’t so great for bonds because it’s high enough to create some inflation implications, but low enough to sort of obviate some of the deleterious impacts on economic growth. In other words, a mildly negative double whammy for the bond market. A bigger double whammy was the fear going into the weekend as the US and China were set to negotiate trade in Switzerland. There were even some comments from a Swiss finance minister on Friday that caused some volatility. But everybody knows what has happened as of Monday, if you’ve seen any news coverage of that fact with a 90 day pause on most of the tariffs between US and China, lowering import duties to 30% from 145% for the US. Lowering export duties down to 10%. These are still higher than they were and still inflationary for bonds, but a bit of a shot in the arm for economic optimism as evidenced by the stock market jump in the middle of the night when the news was announced and much remains to be seen, of course, about how things ultimately shake out, but the sense is that tariffs will remain higher than they were in the past and to reiterate for the third time now, modest to moderately higher tariffs are probably the worst case scenario for the bond market because they are inflationary. Without having as bad of an impact on economic growth throughout the rest of the week, we will be focused mainly on tomorrow’s CPI data. Will it matter? We don’t know. We’ve certainly seen some willingness for the market to move in response to a few other economic reports, but inflation is a bit of a wild card due to ongoing changes in tariff policies and the time it will take for those changes to filter through to the real data. 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.