We were hoping for a bounce today.  Did not get it.  UMBS were down 4 bps after the first hour of trading today.

Inflation at the wholesale level rose 0.2% in March and 2.1% YOY, according to the Producer Price Index. If you strip out food and energy, the index rose 0.2% month-over-month and 2.4% year-over-year. While not a disaster like the CPI report yesterday, it isn’t helping the cause, and the 10 year is getting smoked again.

The FOMC minutes from the March meeting did indicate rate cuts were in the near future. While they did note that there might be some seasonality involved with the inflation numbers, the message was steady as she goes.

In addition to the hotter-than-expected CPI print, we also had a pretty lousy 10 year bond auction. The bid-to-cover ratio was an anemic 2.34x, and dealers were forced to buy 25% of the $39 billion issue, which pushed 10 year yields to 4.56%.

Needless to say, the mortgage banks got roughed up yesterday, with Rocket down 13%, UWM down 7%, and Loan Depot down 5%. Mr. Cooper held up reasonably well due to is heavy MSR exposure.

Between all three hawkish events, the Fed Funds futures moved decisively towards higher rates, with the June futures pricing in only a 17% chance of a rate cut, and the December futures pricing in only 1 cut this year. Check out the probabilities from a month ago – markets saw 100 basis points in cuts.

Any time we have a huge day of movement, regardless of the reason, the odds of bigger movement increase for the following days.  Today was especially tense because there was another inflation report that stood the chance to add insult to yesterday’s CPI injury.  But today’s PPI came in right in line with forecasts and bonds subsequently enjoyed a mostly sideways trading day–at least relative to yesterday.  Looked at in a 1-day vacuum, there were swings of more than a quarter point in MBS in both directions.  Lenders were clearly geared up for such things considering the lower-than-average reprice activity.

UMBS closed the day down 13 bps at 99.56

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