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Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
Rate sheets this morning likely to be similar to yesterday, ahead of what is likely to be a lively afternoon for bonds. Reprice risk on the day is high, although we’ll have to wait for the dust to settle before we get a clearer picture of where rates are headed from here. I believe the likelihood is that rates will still creep a bit higher over coming weeks, but are not going to be much worse than the highest rates we’ve seen this year already (about a month ago actually). We’ll cautiously float into the afternoon to see how things play out on the day, no reason not to.
So, today’s the big day… Fed day. First the Fed will release its policy statement at 2pm ET, where it is expected to hold its policy rate steady (meaning NO ONE expects a rate hike at this meeting) and make little changes to the wording from last meeting’s statement. The Fed will also release its dot plot forecast, which will get the most attention. Next, at 2:30pm ET, Fed Chair Jerome Powell will hold his press conference. This is usually when we see bonds stage a bit of a mini rally, if they like what Powell has to say.
Expectations of a Fed rate hike to come in November have continued to fall over the past few days, and today could be a wake up call to markets that at least one more hike is coming this year. However, I doubt that… because even though all of this morning’s mainstream media articles talk about the Fed’s dot plot (the chart that shows anonymous individual Fed member expectations about where rates will end the year for the next few years) will show another Fed rate hike is coming in 2023, markets are just as quick to dismiss it. Markets know it is a lot easier for the Fed to signal one more hike but not pull the trigger than it would be to signal no more hikes and have to hike anyway.
LET’S TALK RATES (read this part)
Rates are not likely to fall significantly lower from here, even if markets get a feel good message from the Fed. That means if we use 7.25% as an “average” for con/con base rates today, we could go as low as 7%… dropping maybe a quarter point. That is in the best of conditions. I really don’t see rates moving back into the 6’s (for con/con, govvies are a bit lower and are already there in some instances). We won’t see significant rate dropping until we see more signals of a weaker labor market and economy, and talk of the Fed cutting rates becomes the more dominant conversation. That isn’t likely to happen until 2024.
Cautiously float all loans, but have a plan on what loans you will lock if things look bad and how long you will wait before pulling the trigger. Remember also that sometimes (often actually) we get a poor response initially after the meeting only to see a strong recovery when Powell speaks at his press conference.
Technicals:
The UMBS 6.0 coupon is at 99.73, which although is +13bps on the day, is really about the same as when I wrote yesterday’s commentary. Yesterday saw mortgage bonds lose ground in the late afternoon, this is just the recovery
The 10yr Treasury yield at 4.34, which continues to be an extremely solid technical support level. If we see a negative response to the Fed in the coming days, I could see the 10yr pushing up to 4.5.
