This is Matt Graham with the MBS Live Market Update. Last week started with more headlines about Treasury buying back its own bonds. But despite widespread news coverage, buybacks have generally failed to inspire a sustained reaction in the market. Traders were even less interested this time around. At best, buybacks can change the balance between shorter and longer-term yields, but they don’t create broad, lasting relief for rates, unfortunately. In practical terms, Monday’s modest improvement had a lot more to do with lower oil prices, which have been and will continue to be a factor in day-to-day bond market volatility as long as they remain elevated due to the Iran war. The same pattern or a similar pattern continued on Tuesday as hopes for progress toward a peace deal pushed oil and Treasury yields lower in relative unison. Things changed on Wednesday, which brought July’s PCE inflation report. That’s the Fed’s preferred measure of inflation. The core reading, which excludes food and energy, was right in line with forecasts when rounded to the nearest tenth of a percent, as is the custom for these inflation reports. But at an unrounded value of point two four seven, it was basically as high as it could have been without rounding up to zero point three, and traders often focus or they increasingly focus on these unrounded numbers to glean directional cues from otherwise uninspiring data. That exercise this time around added some pressure to rates on Wednesday, but it was fairly modest, and it definitely wasn’t the week’s biggest story. That honor went to Fed Chair Warsh’s speech at the Fed’s annual Jackson Hole conference. The Fed speech at Jackson Hole is hit and miss as far as big-ticket market movers go. Sometimes they are completely forgettable, and sometimes they cause massive reactions. This one was somewhere in between. Warsh described the economy and the labor market as strong and that he’d be hard-pressed to describe financial conditions as restrictive. In other words, however high the Fed funds rate is at the moment, it doesn’t seem to be high enough to be impeding growth or inflation. On the inflation topic specifically, he reminded us that the two percent target was indeed firm, fixed, and based on PCE, which is what the market really wanted him to reiterate at the press conference at the end of July, because some listeners felt that he left the door open to move away from PCE as a benchmark, even though he didn’t explicitly say that’s what he was doing. Markets interpreted that combination of comments as a warning that the Fed is in no hurry to cut rates and may actually be more willing to raise them if inflation remains elevated or the economic data remains strong. The implied Fed funds rate at the next Fed meeting is now almost ten bips higher than it was before the Jackson Hole speech. In simpler terms, this means the market has basically priced in another half of a rate hike in the space of twenty-four trading hours. In probability terms, there’s now more than a fifty percent chance of a hike priced into Fed funds futures. But on a qualitative note, I would add that Warsh didn’t really say anything new compared to the late July press conference. Whether we look at that or Friday’s Jackson Hole speech, he basically talked tough on inflation, period. Now, that’s really all we know, and it will be up to data in the coming weeks to sway additional Fed voters into the hike camp. If anybody needs the reminder, it always bears repeating that the Fed does not directly set mortgage rates, or rather that mortgage rates are not directly tied to the fed funds rate. But mortgage pricing does react to the bond market’s expectations about what the Fed will likely do. So because fed funds rate expectations changed rapidly after the Warsh speech, so did mortgage rates. Shorter term Treasury yields rose more than a 10th of a percent after the speech. Medium-term Treasuries felt a good amount of the pressure, and it’s those medium-term Treasuries that do correlate almost perfectly with mortgage-backed securities. The saving grace is that Friday’s average rates were only modestly higher than those seen in the previous Friday. On the downside, we’re off to a sharply weaker start today, presumably due to month-end positioning. And the average mortgage lender is out with rates that are just barely at the highest levels in over a year. In the rest of the week, we’ll get the top tier econ data that typically comes out at the beginning of any given week. And Friday’s big jobs report is, of course, the headliner. As you could imagine, weaker employment data could challenge Warsh’s upbeat assessment and help rates recover, whereas stronger data would reinforce Friday’s message and keep rates under pressure. Last but not least, fuel prices and war-related headlines remain a constant wild card. 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.