The entire week has been dominated by a close correlation between stock prices and bonds yields.  This has been especially noticeable after 9:30am ET on any given day (the NYSE opening bell, when more liquidity and volume hit the market), but even outside those hours, there's been enough correlation that it makes sense to keep an eye on stocks at the moment.  It also serves as a reminder that this week's bond rally may be more fragile than it seems, depending on what the stock market does next. In fact, there is already one subtle sign of that fragility.  It can be seen in the following chart which shows the strong correlation mentioned above.  The subtle part involves the variation in bond behavior at the various low points for stocks.  Specifically, if the correlation were perfect, bond yields would bottom out around the same level at the same time that stocks were hitting their own lows.  A relatively flat line can connect the low points for stocks.  Bonds on the other hand did better than stocks suggested on the 19th and slightly worse on the 20th. Should we read much into this?  Not really.  Correlation such as this is typically only made possible by very small time horizons.  If we zoom the chart out (but maintain the same y-axis scaling used in the chart above), we can see the general trend has been for stocks and bonds to lose ground together since the big shift in the Fed's policy stance in early 2022.  The reconnection is relatively recent, and we wouldn't expect it to be perfectly correlated from here on out. Even if we're not expecting the lines to remain right on top of each other, we can still glean some insight from their relationship.  Going back to the first chart, we can look for similar divergences.  In other words, if stocks make additional lows, and bond yields failed to do the same, one conclusion would be that bond traders are increasingly hesitant to chase the stock sell-off.  That would make us feel more defensive about potential losses in bonds.  Conversely, if bonds manage to make new lows (in yield) without the help of stocks, we might feel a bit more optimistic.  

A brutally fast spike to the highest rates in more than a decade comes with some decent consolation prizes.  Over the past 2 weeks, it has allowed the mortgage market to log several impressively strong days.  To be sure, the rates we're looking at today are still terrible compared to the first week in April, but appreciably better, even when compared to yesterday. The average conventional conforming 30yr fixed rate is roughly an eighth of a percentage point lower in 24 hours.  For most of the past few decades, a move that big was limited to happening a few times per year.  In the past 2 weeks, we've seen 3 of them.  The average lender is now back down to 5.375% after being as high as 5.625% two weeks ago, and closer to 5.5% yesterday. [thirtyyearmortgagerates]

How Low Can Stocks Go? (Bonds Want to Know) Bonds improved overnight and again after this morning's Philly Fed data (a dark horse market mover to be sure).  10yr yields hit their lowest levels in 3 weeks, and at one point were almost 40bps below the highs of 3.2% seen 2 weeks ago.  Bonds may have already been destined to reject 3.2% and recover, but there's no question that the heavy selling in stocks has really accelerated the recovery--so much so that we need to wonder how sustainable it is in the event that stocks find their footing.  Without the stock market influence, it's reasonable to think bonds would still be more sideways compared to the past few months based on data and events, but "more sideways" doesn't necessarily portend additional improvement.   Econ Data / Events Fed MBS Buying  10am, 11:30am, 1pm Housing Starts 1.724 vs 1.765m f'cast, 1.728m prev Building Permits 1.819 vs 1.812m f'cast, 1.879m prev Market Movement Recap 08:47 AM Initially weaker overnight.  Big rally in Europe.  Stocks sliding again (not as much as y'day so far). Bonds liking the weak Philly Fed data.  10yr down over 9 bps at 2.79.  MBS up 3/8ths of a point. 12:15 PM Treasuries trending gently weaker since 9:30am.  MBS have been more sideways but also coming off highs.  10yr down 4.2bps at 2.842 and 4.0 coupons up only 10 ticks now (.31). 01:44 PM MBS still in the day's range, but near the lower boundary, down more than eighth from highs.  10yr yields grinding steadily/calmly higher, now down only 3.3bps on the day at 2.852. 04:03 PM Treasury yields at highs, but trading remains uneventful.  Still in line with levels from the last update.  MBS are holding steady with gains of 0.31

“One minute you're young and having fun. The next, you're turning down the car stereo to see better.” Gone are the days when all loan officers wanted to see from their company was decent pricing on FHA, VA, Fannie, and Freddie programs, and fast processing. Now, in an effort to do the harder deals (and they’re all harder now, right?), LOs want to see some adjustable-rate programs with decent pricing, non-QM offerings, “green” products, and affordable housing products. On a larger scale, we’re all watching the Fed try to make up lost ground in fighting inflation (+8.3 percent through April for the last 12 months), raising rates but not causing a recession. Look for the term “neutral rate” to gain some press: the point at which interest rates neither boost nor hinder economic growth. Recession? "The underlying strength of the U.S. economy is really good right now. The U.S. economy is strong, the labor market is extremely strong. It is still at very healthy levels. Retail sales numbers, the economy is strong. Consumer balance sheets are healthy. Businesses are healthy. The banks are well-capitalized. This is a strong economy. We think it is well-positioned to withstand less accommodative monetary policy and tighter monetary policy.” (Today’s podcast is available here and this week’s is sponsored by Candor. With Candor’s Machine as an Underwriter, lenders modernize their manufacturing infrastructure making them immune to margin, capacity, and staffing challenges forever. Candor’s AI solution can be deployed in 30 days, delivering fast and flawless loan production.)

Remember when the Fed began to abruptly revise its policy tightening pace at the start of the year and both stocks and bonds began to sell off?  That's the logical play for markets when the Fed ratchets up its tightening pace, but by the end of March, stocks were able to bounce enough to allay fears about the onset of a bear market.  The bounce proved to be a dead cat, and 6 weeks later, the bear is at the door or already in the living room if you ask the NASDAQ.  Even the S&P (via futures) is at the -20% mark vs late December highs this morning. The big stock swoon is helping bonds, but it will need to coincide with legitimately lower inflation if we're to yields decline even half as quickly as stocks prices. That said, with the help of Thursday AM data (and overnight stock weakness) yields have fallen enough to question the trend that was intact as recently as Wednesday afternoon.  In so doing, we're likely to find that it's more appropriate to move the goalposts than to conclude the ideas that underlie the trend are no longer relevant. Moving the goalposts has a shady connotation.  No one likes playing a game where the rules can be changed in the middle, but don't think of the bond trend that way.  The purpose of the trend is to capture an idea and measure its progress.  The idea in the case of the previous trend was that, although bond yields have been moderating, they remained under a bit of pressure as markets wait for inflation data to play out in the coming months.  Now that stocks are digesting China's covid lockdowns, and other global growth concerns, bonds are simply under a bit less pressure.  Either way, moving the goalposts is actually a necessary step in order for our baseline outlook of a choppy, sideways range to take shape.   In other words, maybe we'll be talking about the blue "eventual line," or some other nearby horizontal level as the next location for the goalposts.  A warning though: for now, friendly developments in the trend are heavily dependent on large, ongoing losses in stocks.  If stocks manage to find their footing and bounce in any sustainable way, bonds probably won't like it.  The exception would be over the longer run (a few months out) if stocks were bouncing because inflation data improved faster than expected and the Fed surprised the market by acknowledging it that quickly.  Bottom line: this is "nice" for now, but there can't be a big, sustainable rally in bonds without compelling signs that inflation is on course to return to normal (or close to it).

There has been a lot of volatility in the bond market recently.  Because bonds drive interest rate changes, that's meant plenty of volatility in the mortgage market as well.  The month of May has been less universally awful compared to March and April, one of the worse 2-month stretches in the modern history of rates.  But in transitioning from "awful" to "something else," mortgage lenders are scrambling to set rates at the right levels. Yesterday saw the bond market swoon all day.  By the end of the day, some mortgage lenders had pulled back (i.e. raised rates) by quite a bit.  Others waited until this morning.  Either way, this morning's rates were distinctly higher than those seen over the past 3 business days. As the day progressed, an extremely big drop in the stock market sent investors seeking safer havens in the bond market.  Excess demand for bonds pushes bond prices higher.  When bond prices rise, yields (another word for "rates") fall.  By the end of the day, most lenders had re-issued rates at lower levels, more closely aligned with those seen last Friday. This doesn't change the fact that rates are still in the mid 5% range, depending on the scenario.  They're just slightly lower than they were yesterday afternoon or this morning.

What Does Today's Rally Mean For The Bigger Picture? Bonds began the day in flat to slightly weaker territory, but that didn't last long.  A gigantic wave of selling in equities markets grew to tsunami-like proportions as the day progressed.  Unlike many other examples of days where stocks fall 3-4% by noon, there was no major attempt to recover before the 4pm NYSE close.  It was very clear throughout the day that the progressively larger selling spree in stocks was responsible for the progressively larger rally in bonds.  With oil prices following the same path, "global growth concern" was the topic of the day.  With all this being the case, today's bond rally, in and of itself, means very little for the bigger picture because its existence is predicated on ongoing stock losses.   Econ Data / Events Fed MBS Buying  10am, 11:30am, 1pm Housing Starts 1.724 vs 1.765m f'cast, 1.728m prev Building Permits 1.819 vs 1.812m f'cast, 1.879m prev Market Movement Recap 08:38 AM Initially stronger overnight before losing ground in the run up to domestic session.  Volatile little swings in early trading with 10yr currently down a hair at 2.991.  MBS down 6 ticks (.19) at 98-26 (98.81). 11:16 AM Solid gains now as stocks and oil swoon.  10yr down 7bps at 2.926 and MBS turning green, now up an eighth at 99-04 (99.125) 02:08 PM Flight to safety continues with stocks down almost 4% and 10yr yields down more than 10bps to 2.888%.  MBS are up 3/8ths, underperforming due to their shorter duration (and the fact that the yield curve is flattening today.

The regular monthly release of the New Residential Construction report from the Census Bureau is typically fairly dry.  To be fair, this month's update is no exception outside the housing nerd community.  But even amid the seemingly soporific data, we can find some interesting themes. First off, there's the fact that construction activity continues to operate near its best levels since before the housing meltdown more than a decade ago.  Building permits technically dropped 3.2% from last month, but that's after an upward revision of 1.2%.  More importantly, despite the drop, the outright pace of 1.819 million units per year means the last 5 months been over 1.8 million.  January 2021 was the only other month over 1.8m going back to 2006.   The story is similar for the next construction phase, Housing Starts (a measure of when construction actually begins).  Starts held fairly steady at 1.724m, making April the 4th best month since 2006. The gap between permits and starts highlights the first aspect of the current challenges faced by the industry.  It's a lot easier to file some paperwork than it is to actually break ground.  Moving on to "Housing Completions," we see it's even harder to finish construction.  Completions have flat-lined in a range centered on April's level of roughly 1.3 million--the same level as early 2019.  Back then, there were almost 600k fewer Housing Starts and Building Permits.

One side effect of following the market very closely during times of heightened volatility is that the short term developments on any given day run a high risk of contradicting the developments of the previous day.  This is one reason that we have a longer term baseline, both for the trend in rates and for the targets required to consider a change in that trend.  But headlines would get boring if every one was "______ today, but general trend continues."  So instead we have headlines like "reversal reversing?"  In today's case, this refers to solid gains that have already almost completely erased yesterday's "reversal" toward higher rates. The key consideration, yet again, is a sharper sell-off in stocks.  Oil is involved as well. As always, remember that the correlation between stocks and bonds is not perfect, nor is a stock sell-off always going to be a reliable predictor of bond movement.  That said, chances are greater when stock selling is bigger (the big exception is stock sell-offs that coincide with Fed policy tightening, which tends to hurt both stocks and bonds).  Zooming out a bit on the chart helps us put the stock losses in better context. While the gains are always nice, and while we can technically say that yesterday's reversal is reversing, it's not doing anything to change the bigger picture trend. 

As the MBA’s Secondary Marketing Conference wraps up in Manhattan, and the 1,200 or so registered head home and face post-conference life, Rob B. asks, “What was the mood of the attendees: Denial, anger, bargaining, depression, or acceptance?” The talk in the hallways revolved around constructive things like ARM investors and pricing, outlets for investment and second homes, lock and shop programs, extended locks, all-cash programs, and the various vendor offerings. On a larger scale, the FHFA, acting through Fannie and Freddie, has a lot going on. The Agencies continue to retain earnings and are doing credit risk transfers while the FHFA is in constant contact with U.S. Treasury. Both are striving to serve the underserved, and the actions must be sustainable. Progress has been made in terms of solar panels, green bond program, affordable housing programs, green specified pools, protecting borrower information, and addressing climate-related losses due to storms and earthquakes. Both F&F are looking at “growing the pie” while managing their credit risk. (Today’s podcast is available here and this week’s is sponsored by Candor. With Candor’s Machine as an Underwriter, lenders modernize their manufacturing infrastructure making them immune to margin, capacity, and staffing challenges forever. Today’s has an interview with Sara Knochel, CEO of Candor’s burgeoning Data & Analytics business on the dearth of loan data available for lenders, servicers, and cap markets players and how data can be used as a strategy to improve operational efficiency.)