Happy Cinco De Mayo!
This is a much lighter week for economic data compared to last week’s schedule but there are still some very important releases.
A large supply of 10-year and 30-year Treasuries will be auctioned off as well as a lot of “talking Fed’s” this week with Fed Chair Janet Yellen testifying before Congress Tuesday and Wednesday. We will also hear from Evens, Stein, Tarullo and Bullard.
There are just a few economic reports that have the gravitas to actually move pricing. These include ISM Servicing, Non-Farm Productivity and Wholesale Inventories.
But once again….the “Teflon Bond Market” is all about overseas.
Across the pond: Shockingly, Russia and Ukraine did not magically become friends over the weekend and this will continue to provide fantastic support for pricing. This morning, MBS are up even more due to weaker than expected economic data out of China.
TODAY’S EVENTS
ISM Non-Manufacturing (Servicing): The servicing sector accounts for 2/3 of our economy. This report was better than expected (55.2 vs estimates of 54.1) and is the best reading since August. This is the type of data that can really hurt mortgage back securities (MBS) pricing. It has moved pricing off of early morning highs but international concern is simply providing too much support.
MBS OVERVIEW – LEARN FROM THE PAST
MBS gained +46 basis points (BPS) from last Friday’s close which caused 30-year fixed mortgage rates to move lower from the prior week. The market saw the lowest rates on Friday and the highest rates on Tuesday.
As a refresher for you – when the economy and labor market expands, long term bonds suffer which is why you see interest rates rise when you see strong economic growth. And that is perfectly natural. You can’t have a growing economy AND low rates at the same time under normal circumstances. But that is exactly what we have right now. Last week’s economic data was very, very strong.
On the housing front, Pending Home Sales were better than expected (+3.4% vs estimates of +1.0%), and the Case-Shiller Home Price Index showed a 12.9% gain in home prices over the past year. On the labor front, ADP Private Payrolls were better than expected (220K vs estimates for 210K) and the Non-Farm Payrolls was much stronger than market forecasts (288K vs estimates for 210K); plus the past two months were revised upward. The Unemployment Rate dropped to 6.3% but this was largely due to the participation rate dropping as close to 1 million people said that they were not looking for work any longer.
On the manufacturing front, Chicago PMI was very robust (63.0 vs estimates of 56.7), and ISM Manufacturing was hot with a reading of 54.9 (vs estimates of 54.3). Our first look at the 1st quarter GDP was disappointing but this number will be revised two more times and the market is largely discounting the report due to the horrible weather that we had during that period.
The Federal Reserve Open Market Committee voted to reduce their monthly Treasury and Agency mortgage backed securities further…so that means less demand and less support for long term bonds.
So…all of the above makes a wonderful text-book case for a huge sell-off in bonds and therefore a big run up in rates. But that is not what happened. Why?
This is because of all of the headlines out of the Ukraine/Russia conflict. Headlines of pro-Russian “civilian” forces capturing administrative buildings, taking hostages, shooting down helicopters and our weak sanctions against Russia are doing nothing to deter them. This has foreign money flocking to U.S. bonds which is driving up demand and therefore…driving down interest rates.