UMBS are coming in the year rough. 6.0 coupon is down 17 bps. 5.5 Coupon is down 34.
Bonds sold off somewhat sharply in the overnight session on an unknown combination of the following factors:
- weaker EU bonds after EU data came out in line with expectations
- a trading environment that no longer benefits from 2023’s end-of-year short squeeze.
- trading levels returning to their last liquid, high volume range seen before the late December lull
- apprehension ahead of big ticket data on the heels of excess bullishness for two straight months.
The first trading day of the new year brought 2023’s scorching rally to a halt after a more than $8 trillion surge in
the S&P 500 last year. Tensions in the Middle East sent oil surging, while Chinese data came in weak. Futures on the tech-heavy Nasdaq index lost 1% as shares of Apple Inc. fell in US premarket trading after a downgrade by
Barclays Plc. Yields on 10-year US bonds and German bunds added more than five basis points as money markets wagered on fewer than 150 basis points of easing by the Federal Reserve in 2024.
From Brent Nyitray
In early 2024, the full lagged effects of the 2022-2023 rate hiking cycle will be fully felt. Historically, a 525 basis point tightening regime would have caused a severe recession, but perhaps the sheer unprecedented amount of fiscal stimulation during the pandemic years and beyond was able to soften the blow.
Theoretically the Fed should focus solely on inflation and unemployment, however theory and practice don’t always mix.
Apartment rental rates are expected to continue to soften in 2024. Rents rose about 20% between 2021 and 2022, however they were flattish in 2023. We currently have a record number of multi-family units under construction, so rental growth should continue to be flat to negative. Most of these units are expected to open in the next 12 months, so we will have a deluge of new units, especially in markets like Nashville, Austin, Dallas and Atlanta.
The bond market started off the new year with the highest volume since December 15 and the highest rates in at least as long. In fact, today’s domestic session high of 3.974 was almost perfectly in line with the 3.971 back then. This could be taken as an indication that the late December bullishness is giving way to something more defensive in January. The other way to look at it would simply be that yields were never being true to themselves down in the 3.8% range. That was just the product of the holiday trading environment and now we’re getting back to the business of deciding whether or not we’ll remain under 4%. Call us old fashioned, but the incoming data will likely play the biggest role in that determination
UMBS closed the day down 20 bps on the 6.0. Down 30 on the 5.5
Despite the wall of worry that envelopes financial markets, let’s start of 2024 with a bit of good news — in the year just ended the US MBS index sported the first annual positive excess return since 2019, earning 68 basis points in total. This is the best annual showing since the 98 basis point return seen in 2014. Since the end of the 1980s, the index has earned an average annual return of 20 basis points, so we can safely file 2023 in the “good” column in terms of performance.