What you Should Know About Yesterday's Rate Move

Capital Markets

Huh? You don’t own a crystal ball and didn’t lock your borrower earlier this week? Unfortunately, I don’t own one either, so once the price wars begin in the mortgage space, I may need to find a new career. I was thinking being a rapper would be fun. What do you think of this rhyme? “When this pandemic ends, I’m gonna spend!” Apparently, many others are thinking the same thing, and that is why mortgage rates went up yesterday.

Investors are okay if the move is driven by inflationary expectations, a “technical” move. But many believe rates have moved too far too fast. Will the Federal Reserve move from “being comfortable” with rates going up to “monitoring” rates going up? Due to the pandemic, our government is incurring huge deficit spending, with trillions of dollars more of stimulus coming. Someone has to pay for that. Every day we have a growing Federal Reserve balance sheet as the New York Fed continues to purchase Treasury and MBS. Fortunately, as older, higher interest rate debt matures, it is being refinanced by our government at lower rates, and this lower debt service is delaying the impact of the government spending. But the markets are certainly looking ahead to the pent-up spending that will happen as the pandemic (hopefully) winds down.

Yet the market is realizing that ultimately someone has to pay for it, traditionally in the form of higher taxes. On top of this, inflation concerns are emerging, especially as investors look ahead to a potentially booming economy as the pandemic winds down. The Federal Reserve has made it clear that it can change course quickly based on economic conditions.

The yield on the “benchmark” risk-free U.S. 10-year T-note hit 1.61 percent yesterday. The bond market experienced a relentless sell-off with the 5-year and 10-year Treasury notes rising +19 bps and +13 bps, respectively, largely due to inflation fears. We also saw awful demand on the $62 billion 7-year Treasury note auction. The selloff wasn’t limited to just the U.S., with global bonds experiencing the same fate as equities were routed in the risk-off trade. Both Atlanta Fed President Bostic and St. Louis Fed President Bullard opined on the move, but neither was concerned about rising bond yields, with Mr. Bullard saying that the move is "probably a good sign," and Mr. Bostic downplaying the need for the central bank to get involved.

I got my hands on one of MCT's client exclusive MarketFlash updates yesterday and found useful recommendations for the deteriorating market, and the new UM30 2.5 market coupon. Lenders should keep up with rising optimal hedge coverage due to rising pull-through, decreasing borrower rate attractiveness, and increasing weighted-average stage in pipelines as lock volume falls. With loans out of the money, be sure to enforce lock policies and prohibit free extensions. Take advantage of AOTs for their cash flow benefits. Watch out for possible decreases in Fed purchases of the 1.5 coupon, and avoid cross hedging that production with TBAs in the 2 coupon. (While live MarketFlash updates like this are exclusive to MCT clients, you can still join the MCT newsletter for market analysis and timely webinars.)

The Primary Mortgage Market Survey from Freddie Mac for the week ending February 25 saw the 30-year and 15-year fixed rates jumping 16 bps and 13 bps versus the prior week to 2.97 percent and 2.34 percent, respectively. The Mortgage News Daily 30-year rate jumped 13 bps yesterday alone to 3.27 percent. Where’s that dang crystal ball?

Today’s economic calendar is already underway with personal income and spending for January (+10.0 percent, +2.4 percent, both strong), and the trade deficit ($83.7 billion). We’ve also received Core PCE Prices (+.3 percent: no major inflation). Black Knight reported that the number of mortgages in active forbearance rose for the second week in a row, climbing by 21k since last Tuesday, pushing the total of those in active forbearance back up above 2.7 million, or 5.1 percent of all mortgage-holders. Later this morning brings February Chicago PMI and final February Michigan sentiment. Today’s month-end MBS purchase session sees the Desk conducting the last two operations on the current schedule totaling up to $5.3 billion. In the afternoon, the NY Fed Desk will release a new schedule covering the March 1 to 11 period that is expected to total $56 billion or $6.2 billion per day. We begin the day with Agency MBS prices better/up by .375-.50 versus Thursday night and the 10-year yielding 1.46 after closing yesterday at 1.52 percent