UMBS opened the day down 15 bps. S&P futures down 34.5 points.

Bonds got hammered yesterday after a lousy bond auction of 5-year notes, which sent the 10 year yield back above 4.5% to end at 4.55%. Bonds and MBS are weaker again today.

Despite opening flat and briefly moving into positive territory, it’s been a bad morning for bonds with the longer end of the yield curve quickly slipping to even weaker levels.  There are no individual, overt motivations in terms of data, news, or events.  There was a comment about stagflation risk from JPM’s Dimon, but that’s about it.

Minneapolis Fed President Neel Kashkari isn’t ready to start thinking about rate cuts yet, and warned about the possibility of another rate hike in an interview with CNBC yesterday. “Many more months of positive inflation data, I think, to give me confidence that it’s appropriate to dial back…”

Home prices rose 6.6% in the first quarter of 2024 compared to the first quarter of 2023. “U.S. house prices continued to grow at a steady pace in the first quarter,” said Dr. Anju Vajja, Deputy Director for FHFA’s Division of Research and Statistics.  Home prices hit a new all-time high, according to the Case-Shiller Home Price Index. Regionally, the Northeast remains the top performer with an 8.3% annual gain, showcasing robust growth compared to other metro markets. Conversely, cities like Tampa, Phoenix, and Dallas, which saw top-tier performance in 2020 and 2021, are now growing at a slower pace. COVID was a boom for Sunbelt markets, but the bigger gains the last couple of years have been the northern metro cities.

Consumer confidence improved in May, according to the Conference Board. “Confidence improved in May after three consecutive months of decline,” said Dana M. Peterson, Chief Economist at The Conference Board.

The present situation index remains well above the expectations index. Fewer people thought jobs were hard to get and expectations improved slightly. That said, the expectations index remains firmly mired in recessionary territory, with inflation expectations increasing from 5.3% to 5.4%.

Note that inflationary expectations are a key input to Fed decision-making since there are all sorts of ancillary behavioral effects that go along with it.

7yr auction   =  4.65 vs 4.637 expectations.

Bid to cover = 2.43 vs 2.53x recent avg

This week’s Treasury auctions haven’t done the bond market any favors.  None of the results have been catastrophic, but all have been moderately weaker than expected.  Bonds have responded to all three and the just-concluded 7yr auction is garnering a similar response to yesterday’s 5yr.

There are certain days and even weeks where the bond market could reasonably do whatever it wants without one outcome being more surprising than the other.  This is one of those weeks.  Yields began on the doorstep of the 4.50% technical level.  If markets treated it as breakout selling cue, the result is today’s closing levels over 4.60%.  But if the market opted to maintain the range, it would be just as reasonable to see yields trading under 4.40%.  Either way, we’re left to examine the bottom shelf market movers and explain how those outcomes fit a higher/lower yield narrative.  In this case, it’s higher, but the point is that nothing has really changed and nothing is really being decided in the bigger picture.

UMBS closed the day down 12 bps at 99.69