Surprisingly Big Sell Off Relative to The Inspiration
Bonds ended up selling off somewhat sharply today with the bulk of the blame apparently reserved for the UK/US trade deal. In fact, the pace of the selling wasn't something we would have predicted when the details emerged this morning. This raises questions about what other motivations could be in play. Certainly, the "precedent thesis" is relevant (i.e. what does today's deal imply about how other trade deals may look?). The simplest way to approach it would be to conclude that tariffs will go up enough to increase inflation, but not so much as to hinder growth--both bad for bonds and for the Fed's rate cut prospects.
Econ Data / Events
Jobless Claims
228k vs 230k f'cast, 241k prev
Unit Labor Costs
5.7 vs 5.1 f'cast, 2.2 prev
Market Movement Recap
09:16 AM Slightly stronger after AM data, but still weaker on the day. MBS down 1 tick (.03) and 10yr down 1.3bps at 4.283
10:40 AM weakest levels of the AM. MBS down 6 ticks (.19) and 10yr up 4.6bps at 4.316
02:46 PM sharply weaker after auction with MBS down 3/8ths and 10yr up 10bps at 4.37
Mortgage rates moved back up to the higher levels seen earlier this week after the official announcement of a trade deal between the U.S. and the U.K. Most lenders actually began the day fairly close to yesterday's latest levels, but were ultimately forced to raise rates in response to weakness in the bond market. The rationale for this market reaction can be debated. Some market watchers conclude that a trade deal is simply "good for stocks and bad for bonds" because it's economically bullish. While that sentiment CAN account for some of the movement, it's not the whole story. Bonds (which dictate rates) have specific concerns regarding inflation, foreign demand, and issuance needs. These are high level topics that are beyond the scope of a daily mortgage rate recap, but suffice it to say "rates have a lot on their minds" when it comes to how trade policy shakes out. Unfortunately, it's sort of a no win situation in the short term. The only exception would have been a full exemption from tariffs. In the bigger picture, today's mortgage rate increase is unremarkable--sort of average--and it leaves the rate index well below the early April highs, despite being well above the range seen during the month of March.
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Bonds mostly lost ground in the overnight session, and then lost just a bit more ground after the 8:30am econ data. This consisted of Jobless Claims coming in slightly lower than forecast, and Labor Costs rising to 5.7% for Q1 vs 2.0% in Q4. Of the two, the latter likely accounted for the initial selling impulse, but it was short-lived. Bonds rallied with 10yr yields dropping almost 4bps, and have since bounced back to the weakest levels of the morning (but this is too far removed from the AM data to blame the AM data). The only other relevant scheduled even is the 30yr bond auction at 1pm ET. Apart from that, trade related headlines may cause some ebbs and flows with the US/UK deal being announced.
Just as Underwhelming as Expected
No sense in trying to manufacture excitement out of something boring. Even before Fed speakers went into the customary blackout period 12 days ago, it was already abundantly clear that they were all on the same page--a page of uncertainty in an uncertain chapter of an uncertain book. Nothing had changed in the past 12 days that would allow the Fed or Powell to be any less uncertain about which of the two competing forces on rates would win out in the coming weeks/months. As such, there was nothing Powell could do but reiterate that fact 17 times for the 17 different versions of the same question. It's no surprise bonds are heading out the door precisely in line with pre-Fed levels.
Market Movement Recap
09:15 AM Sideways to slightly weaker overnight with a modest bounce in early trading. MBS up 1 tick (.03) and 10yr up less than 1bp at 4.305
02:05 PM 10yr yields are down 3.0bps on the day at 4.268 and MB are up 6 ticks (.19).
03:23 PM Some back and forth during press conference, but largely at pre-Fed levels. MBS up just over an eighth and 10yr down 2bps at 4.278
Watching Rates
Check our some recent articles and posts about current rates.
Mortgage rates moved back up to the higher levels seen earlier this week after the official announcement of a trade deal between the U.S. and the U.K. Most lenders actually began the day fairly close to yesterday's latest levels, but were ultimately forced to raise rates in response to weakness in the bond market. The rationale for this market reaction can be debated. Some market watchers conclude that a trade deal is simply "good for stocks and bad for bonds" because it's economically bullish. While that sentiment CAN account for some of the movement, it's not the whole story. Bonds (which dictate rates) have specific concerns regarding inflation, foreign demand, and issuance needs. These are high level topics that are beyond the scope of a daily mortgage rate recap, but suffice it to say "rates have a lot on their minds" when it comes to how trade policy shakes out. Unfortunately, it's sort of a no win situation in the short term. The only exception would have been a full exemption from tariffs. In the bigger picture, today's mortgage rate increase is unremarkable--sort of average--and it leaves the rate index well below the early April highs, despite being well above the range seen during the month of March.
There's nothing like a Fed announcement day to get almost every media outlet to run headlines that attempt to tie the day's market movement to the Fed's rate decision. The problem in today's case is that there wasn't even anything remotely resembling a decision, nor did anyone expect there to be. Markets were effectively betting on a zero percent chance of a rate cut at this meeting, and that's been the case for several weeks. Fed speakers had also been very clear in their shoulder shrugs during that time, saying that there are two big policy considerations in play right now, each arguing in the opposite direction. Specifically, the Fed has a mandate to "promote maximum employment," which could also be viewed as "promote a strong economy," and a mandate for "price stability," which is fancy talk for the Fed's inflation fighting role. When Fed speakers have recently referred to those two mandates being in tension, they mean the potential drag on the economy from tariffs and tighter fiscal policy argues in favor of lower rates if it translates to higher unemployment and weaker economic data. Contrast that to the potential increase in inflation due to tariffs, which argues in favor of higher rates. Simply put, there was nothing the Fed could do today but sit on its hands and wait to see which side of the mandate ended up having more compelling evidence, and nothing for Fed Chair Powell to do but reiterate that fact multiple times when almost every reporter asked a different version of the same question.
Mortgage rates were unchanged for the average lender this morning, thanks to a modest improvement in the bond market overnight. Rates were on course to remain mostly flat until the afternoon's scheduled 10yr Treasury auction. The market's reaction to the auction allowed many lenders to revise mortgage rates slightly lower. Mortgage rates are based on securities that are similar to US Treasuries in many ways. As such, when something happens that impacts Treasuries, the mortgage securities market tends to feel it. This doesn't always prompt an immediate change in mortgage rates because lenders only tend to make mid day changes when the underlying market makes a big enough move. Today's market movement wasn't exactly massive, but it was enough for most lenders to make an adjustment. In the bigger picture, a strong reception for a 10yr Treasury auction is reassuring for rates in general. That said, it will continue to be economic data and key fiscal developments that dictate momentum going forward.
Mortgage rates faced a slight headwind on Monday as economic data caused weakness in the bond market. This would typically result in higher mortgage rates, but in today's case, the damage was minimal. One thing to keep in mind is that mortgage rates don't change in real time with the market. Lenders set rates once in the morning and only change them when the bond market experiences a certain threshold of volatility. A small handful of lenders met that threshold and ended up raising rates this afternoon, but the average lender remained right in line with Friday. The implication is that if the bond market were to start tomorrow exactly where it's ending today, most lenders would be in a position to set tomorrow's rates slightly higher. This is purely hypothetical, however as there's no way to know which direction bonds will move overnight.
