UMBS are up 8 bps on the open.   Stock futures are down 49 points

These PMIs from S&P Global are the day’s most relevant market movers in terms of economic data.  As always, the services sector variant is the more important of the two, and it shows based on the bond market reaction.

The selling isn’t exactly extreme at the moment, but it has made for a noticeable shift up from the lowest yields of the day

S&P Services PMI = 56 vs 55 f’cast,       [55.3 prev]

S&P Manufacturing PMI = 49.5 vs 51.7 f’cast,      [51.6 prev]

Existing home sales fell 5.4% last month to a seasonally-adjusted annual rate of 3.89 million. “We’re seeing a slow shift from a seller’s market to a buyer’s market,” said NAR Chief Economist Lawrence Yun. “Homes are sitting on the market a bit longer, and sellers are receiving fewer offers.

The median home price rose to 426,900, which was a 4.1% increase from a year ago. The first time homebuyer share fell from 31% to 29%, while investor purchases fell from 18% to 16%. The 3.9 million pace of existing home sales is pretty consistent for a housing recession. To put that number into perspective, we did something like 5.3 million in 2019.

Fannie Mae’s latest housing forecast is out. They see the 30 year fixed rate mortgage ending the year at 6.7%, and gradually falling to 6.2% by the end of 2025. Home price appreciation is expected to remain in the 6% range before falling into the 3% range in 2025. They expect to see 25 basis points in rate cuts this year and another 75 bp in 2025. The core PCE inflation rate is expected to fall to 2.7% this year and 2.3% next year.

• 5yr auction
  • 4.121 vs 4.110 expectations
• bid to cover
  • 2.4 vs 2.36x avg

Bonds lost ground after the 5yr Treasury auction even though it was only slightly weaker than expected.  That said, bonds weakened a bit heading into the auction.  In other words, it would have been an even weaker auction if not for the initial weakness in the noon hour.

Bonds began the day in stronger territory and remained stronger through mid-day despite AM volatility.  Some of the volatility was driven by economic data with S&P Global Services PMI coming in higher than expected.  Most of the day’s movement, however, was driven by “something else,” and something else pushed longer term yields higher while allowing short term yields to remain lower.  How do we reconcile that in this era where “data dependence” is so often repeated as the bond market’s prime directive?  First off, while today’s volatility was unpleasant in the afternoon, it was very small in the bigger picture.  It was also not so much about bond market weakness as it was about the yield curve normalizing.  This is not a phenomenon that will always need to play out at the expense of the 10yr and MBS.  That’s just the way it played out today.

UMBS closed the day down 10 bps at 100.75