What happened last week?
Mortgage backed securities (MBS) lost gained 40 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower for the week.
While the Federal Reserve sucked all of the oxygen out of the room, quietly it was the shrinking German 10Y bund yield that had the most impact on MBS trades as it fell back below zero and the benchmark negative rates overseas made our relatively higher yield MBS very attractive.
The Talking Fed
Key takeaways from their release:
For the first time since their September 2014 meeting, there were 3 votes against. Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
– Left their key interest rate at 0.2% to 0.5%.
– Kept their MBS purchase program in place will continue to reinvest all principal received on existing MBS holdings to purchase new MBS every week. (has been averaging $7B per week).
– Lowered their 2016 GDP estimate from 2.0% down to 1.8%.
– Now projecting 2% inflation rate not until 2017.
– Said that economic activity picked up from the modest pace seen in the first half of this year.
– Key quote: “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
Fed Chair Janet Yellen Live Press Conference
– Had a “hawkish” tone with the statement “the case for an increase in fed funds rates has strengthened but [we] decided, for the
time being, to wait for further evidence of continued progress.”
– Said “Our decision does not reflect a lack of confidence in the economy.”
– Said “Conditions in the labor market have strengthened and we expect that to continue, and while inflation remains low we expect it to rise to our 2 percent objective over time.”
– Said “We are generally agreed that gradual increases in the federal funds rate to remove what is a modest degree of accommodation will be appropriate, but we don’t see the economy as overheating now.”
– Said “risks to the outlook have become roughly balanced.”
– Said “I would expect to see (a rate increase this year) if we continue on the current course of labor market improvement, and there are no major risks that develop and we stay on the current course,”
Boston Fed President Eric Rosengren (the third dissenting vote) said he expects Unemployment to drop to 4.5% by 2019 (which means steady and maximum employment over the next 2.5 years). And said the sustainability of the economic expansion makes the case for raising interest rates compelling.
Former Fed Chair Alan Greenspan said that he sees a very scary bond bubble on the horizon.
What’s on the agenda for this week?
Tomorrow, there may be some volatility in pricing depending on how tonight’s debate goes and on OPEC. And IF Trump is strong and OPEC gets a freeze, then MBS will be under pressure. Neither may come to pass but the combo of both could carve off some pricing.
The three things have the biggest potential to directly influence long bond yields (and therefore mortgage rates) are: (1) OPEC Meeting, (2) Presidential Debate and (3) PCE
(1) OPEC Meeting:This Tuesday’s meeting will be key. While no one expects any real cuts, there has been swirling discussions on putting some “freezes” on current levels. This is important for a couple of reasons. First and foremost, this is a group that is politically fractured and has not been able to move markets as they simply have not been a unified front. But if the new minister can piece an agreement together, this could mean that they will once again have some influence. Secondly, anything that would cause WTI Oil to move back above $50 is inflationary and therefore negative for all bonds.
(2) The Great Debate: The most anticipated presidential debate in decades could get Superbowl level ratings. But how can this impact rates? Well from purely an analytical point of view, generally speaking – a Trump Presidency will mean higher rates. But is that a bad thing? Moving from 0.375% to 0.500% Fed Fund rate to a 3.50% Fed Fund Rate is not the issue. Interest rates are reflection of the state of the economy. A high interest rate signifies an economy growing too fast. A super low interest rate signifies an economy that is contracting or barely growing. We know from the Central Bank that they are forced to have certain policies in place because our elected officials have had gridlocked. We haven’t had a budget in almost 10 years! So, here is how long bond traders look at this: If Trump wins, his lower taxes and a balanced budget would be better for economic growth than Hillary’s plan and no budget (i.e., more of the same gridlock). From a regulatory point of view, many would prefer Hillary because of the gridlock.
(3) PCE:While there is no GDP this week, it’s a tired old 3rd revision to the 2nd quarter. But PCE (specifically Core YOY) will be closely watched to see if we make any headway to that magical-mythical 2% level.
Treasury Auctions this week
09/26 2 year note
09/27 5 year note
09/28 7 year note
The Talking Fed
There is a huge dose of zombie talk this week:
09/26 Neel Kaskari, Robert Kaplan, Dan Tarullo
09/27 Stanley Fischer
09/28 Loretta Mester, Esther George, Charles Evans, James Bullard and Janet Yellen
09/29 Patrick Harker, Dennis Lockhart and Janet Yellen
There were no major domestic reports today and it was a lukewarm 2-year Treasury note auction. WTI Oil increased but offsetting that was the German 10Y tanking even further.
Housing: August New Home Sales were a little better than expected with 609K units on an annualized basis vs estimates of 600K. They were up 20.6% on a year over year basis. Not a factor in pricing and this is still well below the 1M mark.
Treasury Auction: The weekly debt kicked off by dumping by selling $26B of 2YR notes. The yield came in at 0.75% which is a tick below the August auction of 0.76% but demand fell off as the bid-to-cover ratio dropped from 2.83 in August, down to 2.65 at this auction. Non-Dealers only took 56% of the offering which is below their average of 63%.
On Deck for Tomorrow: 5YR Treasury Auction, Consumer Confidence, Case-Shiller, Richmond Fed Mfg and reaction to the debate.
The Talking Fed
Fed Governor Daniel Tarullo spoke today but focused on the banking system and not Fed Reserve policy as it relates to rates. He discussed that the Federal Reserve will seek significantly more capital from the largest U.S. banks and give some relief to smaller banks as it considers reforms to its annual “stress test.”