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01/05/24 RATE MARKET WRAP UP
UMBS 5.5 99.78 (-9bps)
10yr yield 4.05
Bonds saw a bit more improvement earlier in the day and a handful of lenders repriced better. Also, markets have leaned a bit more into that March Fed rate hike, now 75% probable, after digging deeper into jobs report showed large Nov revision and some underlying softness. Advice remains to lock near term and risk averse though, it will take a good inflation report to improve.
Rate sheets this morning will be worse, reflecting this morning’s stronger than forecast jobs data. Reprice risk on the day is low, bonds have already started to recover from the worst levels seen immediately after the jobs data. However, yesterday saw mortgage bonds fail to improve from early losses, and if we combine that with this morning’s jobs data we see a clear pivot in sentiment. Markets are starting to doubt a Fed rate cut will come in March, after pricing one in as almost 90% probable just a week ago. That means mortgage rates are more likely to creep higher than move lower, until that sentiment shifts again.
Non-farm payrolls jumped 216,000, much stronger than the 170,000 that was forecast (but there was a downward revision of 71,000 to the prior two months’ data). The unemployment rate stayed at 3.7%, but was expected to rise. It would have been higher, but the participation rate dropped 0.3% as some 845,000 people left the labor force. No one has an answer on this though, why we saw the biggest drop in participation rate since January 2021. The other factor of course is wages, which moved higher consistent with a tight labor market. Wage gain came in stronger than expected at 0.4%, the same as the previous month.
What does all this mean?
It means that the likelihood of a Fed rate cut in March just dropped A LOT, which will pressure bonds and mortgage rates to creep a bit higher. This jobs data isn’t good for mortgage rates.
Loans closing in less than 15 days should start the day cautiously floating, but look to lock by day’s end. There is a clear turn in sentiment now that the Fed will not be forced to act in March. That could change again, but it would take a surprise better than expected inflation number next week to make that happen. Without a clear path to improvement, locking these loans makes the most sense.
Loans closing in 15-30 days should strongly consider locking, depending on how this morning’s rate sheets come out. Bonds are already rebounding from the worst levels after reacting to this morning’s jobs data. Unless gambling on next week’s inflation data to help, we’ve already seen rates start to creep higher from where they ended last year, and that could continue for awhile if markets continue to ease off the idea that the Fed will be forced to cut rates in March.
Loans closing in 30+ days can continue to cautiously float. These loans have time to see how the inflation data plays out, and how the next Fed meeting goes at the end of the month. Rates WILL continue to fall in 2024, although we may see them creep a bit higher again before they do. These loans have the time to sit back and wait things out.
Technicals:
The UMBS 5.5 coupon is 99.63, -25bps on the day and about the same from yesterday when I wrote the commentary. That’s much better than the 99.36 low we’ve seen on the day immediately after the jobs data came out, which is a good sign that markets are taking the data in stride.
The 10yr Treasury yield at 4.05, back above 4 now but better than the 4.10 mark it hit after the jobs data. Strong technical level at 4.03, will it fall back below there by day’s end? That would be a good sign, but may not happen.
** Part of the reason mortgage rates have fallen recently is that the spread between mortgage rates and the 10-yr Treasury have been shrinking for eight straight weeks. Spreads have been much higher than usual through 2023, and still remain much higher than the historical average. This means that we have room for mortgage rates to move lower even if the 10yr yield doesn’t move as quickly.
