October 5, 2023 – Rate Commentary

• October 5, 2023
• realestatelife
• Business & Markets, Fed, Interest Rates, Politics & Economy, Rates, Real Estate, Real Estate Finance, Recession, World News, Your Real Estate Life

WRAP UP
UMBS 6.0: 98.02 (+19bps)
10yr yield: 4.71

Thankfully a quiet day. Some may choose to risk floating into tomorrow, but the return will be minimal. Jobs data comes out ahead of pricing, and we could see volatility.

Rate sheets this morning shouldn’t be too different than yesterday. Reprice risk on the day is moderate, there’s not a lot of economic data to shake things up until tomorrow’s jobs data, but bonds have been volatile this week regardless. Lots of media attention on how high bond yields have gone, especially the 10yr Treasury, and mortgage bonds tend to follow along. The 10yr hasn’t seen 5% since 2007… but back then mortgage rates were still much lower (anywhere from a point to a point and a half lower actually) because the spread between mortgage bonds and the 10yr was more than half of what it is today. 

Smarter folks than me have pointed out that the government is 43% larger than it was four years ago, and there has been a huge increase in government subsidies, credits, and handouts that are driving the economy. The coming supply of Treasuries required to fund this government (that’s right, it’s not your taxes that fund it, it’s debt) will demand higher yields until something breaks in the economy. Also contributing to a drop in demand is the fact that four of the largest purchasers of Treasury debt have pulled back. The Fed bought about a quarter of all Treasury debt in the past decade, but has been shrinking its balance sheet and warns it will do so for at least another year. China is playing political games and not buying in the bulk it once was but at least is not likely to sell at a loss. Japan is buying closer to home, and lastly banks are no longer keen to load up on “risk free” long dated Treasury bonds that proved to be more risky than expected after the banking debacle in March.

Anyway, all of that simply mean – rates ain’t fallin’ anytime soon.

Nothing significant has changed in the outlook… risks still favor locking. Even if we get any kind of underperformance in labor data this week, we will only see a blip of improvement. Rates are likely to be higher in a month than what we see today, but hopefully not much higher.

Technicals:

The UMBS 6.0 coupon is at 97.73, slightly better than when the commentary came out yesterday, but still down about -10bps on the day.

The 10yr Treasury yield at 4.74, still pulling back after capping out at 4.80%. I still think we will see a jump to 5% before the year is over.