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UMBS 6.0: 99.03 (-30bps)
10yr yield: 4.50
The good news is that bonds didn’t get much worse than this mornings levels, the bad news is that they didn’t improve either (and are not likely too). I think it will get worse before it gets , so am still in a lock bias, although I do think we will see rates eventually return to these levels if we do get worse. Sorry friends, I hate being the bearer of bad news.
Rate sheets this morning will be worse than yesterday, and reprice risk on the day is moderate. Yesterday’s Fed fireworks didn’t give markets any chance of improvement, instead flaming the fires that will see rates creep higher from here. The only good news is that after the dust settles, I think we will only see rates match the worst levels seen a month ago, maybe a smidge higher. My point is I don’t think we are going to see rates creep into the 8s… just that they will hit the high water mark of the range we’ve seen the last month or so.
Yesterday the Fed kept its policy rate the same, which was expected (meaning no rate hike). The policy statement was almost verbatim the same from the previous meeting (other than the rate hike pause), pulling out the talk of the banking system being sound and saying the economy has expanded at a solid pace (versus a moderate pace) and job gains have slowed (versus been robust). The dot plot was not good for mortgage rates, showing that 12 of 19 Fed members say they still expect to raise rates once more this year, and that they see rates being higher in 2024 and 2025 than has been previously forecast. Markets didn’t like this news, and bonds have suffered… which means mortgage rates have suffered. All I have to say here is don’t say I didn’t warn you, and even worse, markets still haven’t fully reacted to the news… meaning we will continue to see rates creep higher from here.
What I didn’t talk about today… jobless claims for the week and continuing claims both fell to the lowest level since January (signaling more labor market strength), the Bank of England elected to pause hiking their rate for the first time in almost two years (but it was a tight vote, 5-4),
I’m in a locking bias, because I do think rate sheets will worsen, and that it is possible I could be wrong about how bad it will get. There is no reason NOT to lock right now, at least not anything closing in the next 45 days. Remember though that rates are cyclical, and we are likely to see these levels again even if we do see them move higher for a little while.
Technicals:
The UMBS 6.0 coupon is at 99.03, and has lost about -80pbs since closing on Monday, and that’s going to look ugly on the rate sheets. I think we could see further loses coming though.
The 10yr Treasury yield at 4.47, and I’m sure we’ll test the 4.5 mark at some point. Hopefully it crests soon, but we could see it move past that 4.5 mark over the next week.
