UMBS were up 5 bps on the morning so far.
From Chris Maloney – Interest rate futures predict five rate cuts this year, and while I am inclined to disagree with that view. Though, should things in the Middle East continue to go from bad to worse all forecasts are off the table; it would be likely that Federal Reserve Chair Powell will do what central bank officials almost always do when the flags wave and the bullets fly. It is said that the first casualty of war is the truth but that is not true — the first casualty of war is sound monetary policy. If the United States finds itself in a major war (and Iran is a far more formidable foe than Iraq or Afghanistan), it will be Damn the Inflation, Full Steam Ahead in the Eccles Building.
The economic data calendar this week will be highlighted by the FOMC rate decision on Wednesday as well as the Powell presser that will follow. It is widely expected that the board will hold rates steady again (it would be the fourth meeting in a row if they do) at its current 5.25% to 5.50% level. The excitement will be in trying to decipher any hints about where the Fed sees monetary policy going forward. Until Wednesday afternoon, investors may keep their cards close to the vest
In August, the Fed Funds rate was at 5.25%, while annual core PCE price inflation was 3.7%. This means the real (inflation-adjusted) short term interest rate was 5.25% – 3.7% = 1.55%. On Friday, the inflation number fell to 2.9%, which means the real short term rate is now 2.35%. If the Fed wanted to maintain the same level of monetary tightness as it had in August, it could cut the Fed Funds rate by 75 basis points.
The last mile in inflation is always the hardest, and the Fed is probably happy to keep rates high as long as the economy continues to expand. That said, they have room to cut rates even taking into account their dual mandate. Note that rate cuts are not the only issue the Fed is considering – quantitative tightening is another. The Fed has indicated it will reduce its balance sheet at a slower pace (i.e. letting fewer Treasuries mature without replacement), which should help lower the 10 year rate, at least at the margin. They don’t intend to do that with mortgage backed securities, however their portfolio is so out-of-the-money they really aren’t getting much runoff in the first place.
Via Rob Chrisman – Diving into 2023’s production via NMLS looking at 234,000 records, Ingenious found that only 24 percent of originators did 24 units or more! 30 percent did 18 or more units, 40 percent did 12 or more units, and 60 percent did 5 or more units.
While the official quarterly Treasury refunding announcement hits at 8:30am on Wednesday, the preliminary notes just came out and bonds like what they see. The most relevant newswire:
US TREASURY: IT EXPECTS TO BORROW $760 BILLION IN JANUARY-MARCH 2024, DOWN $55 BILLION FROM OCTOBER ESTIMATE. This will likely result in lower Treasury auction amounts slightly sooner than markets expected based on the early November announcement.
Bonds started the day in slightly stronger territory with gains in both Asia and Europe overnight. The bulk of the domestic session was flat and uneventful until the 3pm Treasury refunding update. This isn’t the official announcement (that’s on Wednesday), but it offered a hint of what’s to come. Specifically, estimated borrowing needs dropped more than $50 billion for the quarter–not an insignificant amount. The bond market agreed with yields dropping immediately in response. 10s and MBS ended the day at the best levels in a week and a half. While that’s a nice little victory, where we go from here depends very much on the incoming econ data.
UMBS closed the day up 14 bps at 101.19