This is Matt Graham with the MBS Live Market Update. We’ve definitely had our fair share of big news events causing big reactions in the markets over the past few months, especially as they relate to the Iran war. But last week offered a welcome reminder that not every important movement in the market requires a dramatic headline. After moving back toward recent highs in the early part of the week, mortgage rates recovered sharply on Wednesday and then managed to hold those gains through Friday, ultimately ending the week at the lowest levels since mid-May. Some of the improvements were helped by lower oil prices and tame inflation data, but the biggest improvement came from quarter-end trading and specifically, quote-unquote, “rebalancing trade flows.” This is a bit in the weeds, but it deserves an explanation when it is having this big of an impact. There’s a difference between month-end index extensions, that’s something we sometimes discuss, and quarter-end rebalancing, but both are similar. Index extensions can be viewed in a vacuum. They involve large money managers buying and selling bonds in various combinations to match their portfolio to the duration of a benchmark Of mainstream bond market indices. In other words, Bloomberg or Barclays will publish a bond market index, and then money managers will buy and sell bonds in a certain combination to match that index by the end of the month. Contrast that to quarterly rebalancing, which is an inter-asset phenomenon. In other words, in its simplest form, you can think of it as something like the simple goal of holding sixty percent stocks and forty percent bonds. In that case, if stocks go on a major rally over the course of that quarter, that sixty percent could turn into something like sixty-seven just due to the appreciation of the underlying assets. And if bonds simply hold steady or even lose a little bit of ground, they could easily move down to that thirty-three percent. But fund managers need to get back to sixty forty by the end of the quarter, so they either have to sell a bunch of stocks, buy a bunch of bonds, or do some combination of both. That was the key driver of bond market strength last week, especially on Wednesday. Rewinding about a week before that, JP Morgan had published an, a note warning that large sovereign investment funds needed to rebalance much more than normal due to the extremely strong quarter for stocks combined with their very large holdings. We’re talking about things like Norway’s Sovereign Investment Fund and Japan’s version of the same thing. They’re absolutely massive funds. On top of that, you have other smaller domestic money managers that also need to do the same thing. One tricky thing with rebalancing flows is they don’t necessarily happen at exactly the same time. You don’t always see the stock market selling off in a huge way and then bonds rallying at the same moment. And that’s definitely a case that can be argued for June because we’ve seen some days of fairly chunky selling in stocks, and then the financial media passes that off as, quote-unquote, “Investors souring on the AI trade.” But that’s just a, an amateur attempt to explain something that the journalists don’t quite understand. A lot of that trading was very likely driven by profit-taking and rebalancing flows, which are really the same thing after a quarter like this. There’s no official way to measure the timing and scale of this stuff, but it can be inferred from context. In this case, there’s little else that could have explained the huge swings in bonds on Wednesday morning There were no major headlines coming out at the time, and there was no correlated movement in oil prices or stocks. And while it is true that oil was moving lower that morning in concert with bond yields, almost all of the rally in oil had been accomplished before the bond market started rallying. Perhaps even more telling, and probably the most surefire way to confirm what our suspicions tell us, is that Fed Funds futures weren’t really moving at all at the time. If there had been something in the news or economic calendar fueling the bond buying, we would typically see it show up in Fed Funds futures as well. With that, Wednesday accounted for a majority of last week’s strength, but Thursday helped as well, thanks to the PCE inflation data. It only came out as expected, but that was apparently a relief to some accounts whose forecasters were landing on the higher side of the median forecast. Notably, we did see a bigger improvement in Fed Funds futures after that data, but a much smaller improvement in the longer end of the yield curve, which again validates the case for the rebalancing trade flows on Wednesday. Motivations aside, we don’t really care about those. We care about results, and the results were good for mortgage rates again, which spent both Thursday and Friday at their lowest levels in more than a month. The current week could be different, could be similar, but it will likely have different motivations by the end, not the least of which reasons being that quarter end is over tomorrow. We only have three-point-five trading days this week. Thursday’s a half day. Friday is fully closed for the holiday, and data is tightly packed into the Tuesday through Thursday window with the big jobs report coming out 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.