Tuesday – August 27, 2024

UMBS down 8 bps in the first hour of trading.   Stock futures are down 6.25 points

Bonds are under a bit of pressure this morning with a modest extension of weakness that began in European trading hours.   Ongoing tension in Israel continues to weigh on global markets as well after recent escalations involving assassinations of militant leaders.

While this morning’s selling seems to have leveled off for domestic traders, it nonetheless leaves yields at levels that are on the unfriendly side of the prevailing trend.  While it’s true that this is a trend breakout in and of itself, it’s also true that there are other trends to consider.

Home prices rose 5.4% in June, according to the Case-Shiller Home Price Index. New York led the charge, with a 9% increase, followed by San Diego and Las Vegas.  While both housing and inflation have slowed, the gap between the two is larger than historical norms, with our National Index averaging 2.8% more than the Consumer Price Index. That is a full percentage point above the 50-year average. Before accounting for inflation, home prices have risen over 1,100 percent since 1974, but have slightly more than doubled (111%) after accounting for inflation.

Home prices rose 5.7% in the second quarter of 2024, according to the FHFA House Price Index. We are still seeing strength in the East and Midwest, while the West Coast and Mountain regions lag after surging during the pandemic years.

The September Fed Funds futures are still a lock for a rate cut in September, however the handicapping is moving more towards a 25 basis point cut instead of a 50 basis point cut.

Despite a nice little rally from weaker opening levels to stronger closing levels, it was a strikingly uneventful and uninteresting day for the bond market.  Yields continued to operate in the same old range with 15 of the past 17 days trading inside the range set on NFP Friday.  One of the only ways to concoct an interesting narrative would be to call attention to MBS outperformance (5.5 coupons were a bit stronger on the day while 10yr yields were a bit weaker).

We could simply say “Treasury auction cycle” and be done with it, but that’s an oversimplification.  Besides, MBS don’t always outperform on auction weeks.  The more accurate observation is that the short end of the Treasury yield curve outperformed the long end, and MBS have more in common with the short end these days.  In other words, it wasn’t really outperformance by the time we compare MBS with the more appropriate benchmarks.

UMBS ended the day up 8 bps at 101.02.