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UMBS 6.0 99.58 (+93bps)
10yr yield 4.45
Bond held the gains all day, mortgage bonds still above the 100-day moving average… a very clear signal that markets think the Fed rate hikes are over. Very little risk to most loans floating into tomorrow, and we could see rate sheets continue to improve with more of the gains making their way over.
Rate sheets this morning will improve as inflation data comes in better than expected. Reprice risk on the day is low, as bonds rally on the idea that the Fed is done raising rates and will have to cut sooner. Thankfully the data came in slightly better than expected, but the big moves in bonds shows how much pressure was on this report and how even a slightly worse reading could have resulted in rates jumping. Although I wish I could have guaranteed this morning’s win and told you to float into it, I still think locking the loans with exposure was the right move.
Sentiment is now once again clearly in our corner, with markets now pricing in a 0% chance of a Fed rate hike at the next meeting in December (it was 15% yesterday, and if the data had come in showing stronger inflation would have skyrocketed today) and rate cuts to start in May (yesterday it was June). The reaction to today’s inflation data helps reduce some of the risk from tomorrow’s retail sales data, because markets will be much less scared of a strong economy if inflation is still cooling. We’ll also see wholesale inflation tomorrow, but that shouldn’t have any chance of derailing this train.
Again, I wish I could have predicted that we would get better inflation data today and told you to float into this, but I will also once again reiterate how devastating even a slightly stronger reading would have been and why it was the right call to lock ahead of data we couldn’t guarantee. I did point out that a favorable reading would improve rates, but didn’t think that it was worth rolling the dice knowing that rates could have jumped .25% in the Thanos snap of a finger this morning if the data came in the other way even a tenth-of-a-percent. Now that it is behind us though, we want to see just how far rates will improve. Watch today for signs of reversal though, and see how much of the morning’s bonds gains make it to rate sheets.
Rate improvements today will vary quite a bit lender to lender, with some lenders passing along more of the gains than others. Remember, during times of volatility like this, lenders are managing pipeline fallout risk as well as how much of their pipeline would need to float down, etc.. There is often a larger discrepancy among lenders during big moves like we see this morning, but it will usually shake out in a day or two.
For loans closing in less than 15 days that may be floating, continue cautiously floating. Depending on how much of this morning’s gains make it to the rate sheet, watch for signs that bonds lose ground in the afternoon. However, sentiment is clearly on the side of improving rates for the moment, so floating makes sense for anyone that gambled into this morning.
For loans closing in 15-30 days, float. We now have momentum for rates to improve a bit, and unless something changes in the near future the outlook is that we should see rates hold steady or possibly improve over the rest of November.
For loans closing in 30+ days, float. The current outlook is that with another jobs report showing a solid but softening labor market, and another CPI report 12/12 right before the Fed meeting concludes on the 13th, these loans have the best shot of seeing even lower rates if data continues to come in favorably.
Technicals:
The UMBS 6.0 coupon is at 99.50, +84bps on the day but up +130bps from when most pricing came out yesterday. This is another huge swing for bonds, and the 6.0 coupon will now test the 100-day moving average which may act as a resistance level at 99.38. It is likely we see mortgage bonds pull back a bit from the highs to end right below that level. We may see more pullback from there, but if tomorrow’s data rallys mortgage bonds above it we could see even further improvement.
The 10yr Treasury yield at 4.45, well below yesterday’s 4.69 and busting through the 50-day moving average that had been a very solid resistance level the last week which has stopped the 10yr from improving. The next level is the 100-day moving average at 4.31… but the 10yr will likely need some help to get low enough to test it. Let’s see how strong the reaction to tomorrow’s data is, and if that helps.
