UMBS are up on the day! Glorious. With current rate environment we are going to turn out attention to UMBS 6.5 coupons. They are up .38 on the morning.
At first glance, a 4.9 vs 4.3 result on Q3 GDP should be a nail in the coffin for the bond market, but there are a few offsetting factors in play. The most notable in terms of US economic data is the even bigger miss in “final sales”–the consumption component of GDP. It came in at 3.5 vs 4.5 f’cast. This is consistent with a shift in demand alluded to by the Fed last week.
Jobless Claims = 210k vs 208k f’cast
GDP = 4.9 vs 4.3 f’cast!!!!!! [2.1 prev]
Durable Goods = 4.7 vs 1.7 f’cast [-0.1 prev]
GDP Deflator = 3.5 vs 2.5 f’cast [1.7 prev]
GDP Final Sales = 3.5 vs 4.5 f’cast [2.1 prev]
The PCE Price Index rose 2.9%, which is much lower than the numbers we have seen in the Personal Incomes and Outlays readings. Excluding food and energy, the PCE Price Index rose 2.4%. This should be good news for the bond market, although it could explain why the GDP report seems so out of step with the other indicators. If the government is underestimating inflation, it will overstate inflation-adjusted growth.
Beyond domestic shores, the European Central Bank (ECB) announcement has been leading an even bigger rally in European bond markets, and that’s helping to pull Treasury yields lower, but not significantly lower.
After a squabble over whether Fannie Mae and Freddie Mac shareholders were entitled to some moolah following the government’s rather shady claim on enterprise profits, a federal judge has laid down the law – quite literally.
To break it down for those who’ve been under a rock: the shareholders accused the government of wrongfully pocketing enterprise profits. The court decided they’re owed simple interest (because compound is just too fancy), and it should be at a fixed rate.
Shareholders get their due – simple interest at a rate 5% above the Fed’s discount rate from way back in 2012. Maybe now, after the umpteenth trial on this saga, we can all move on.
- 7yr Treasury Auction = 4.908 vs 4.910 expectations
- Bid-to-cover = 2.70x vs 2.55x avg
Granted, 7yr notes aren’t as big of a deal as 5s or 10s, but this certainly doesn’t hurt. If anything, it’s another endorsement of the 5% ceiling in 10yr yields as well as the general notion of a bond market consolidation ahead of next week’s data.
The auction result is all the more impressive given that yields never backed up in advance. 10s have added several more bps to the day’s gains
Next week is one of the most exciting and potentially significant weeks we’ve seen in a while. It has a unique confluence of data, events and background. This includes all the normal top tier data associated with the first week of the month, a Fed announcement, a quarterly Treasury refunding announcement, the likely resolution of a consolidation pattern at the highest yields in more than a decade, and it’s all occurring at a time when officials (and friends) are talking about the disconnect between recent economic data and the increasing chorus of contrary anecdotes. Perhaps that helps explain the current week so far which has seen big swings in both directions. Today’s installment included a paradoxical reaction to stronger GDP data and then a logical reaction to a strong Treasury auction.
UMBS closed the day up 73 bps at 99.23
RIthm Capital (aka New Rez) reported better than expected earningsthis morning. Book Value per share rose 2.7% to $12.32 and earnings available for distribution was more than twice the quarterly dividend.
Mortgage REIT Annaly Capital reported earningsyesterday. Book Value per share fell 12% compared to Q2 as the environment was inhospitable for mortgage assets.
Despite all the bad news, earnings available for distribution did cover the dividend, albeit barely. Annaly stock is down about 22.5% over the past 30 days.
Mortgage REIT AGNC Investment also announced that book value fell 14% from Q2 to a level of $8.08 per share. They will release full earnings next week on the 30th. AGNC’s book value declined more than Annaly’s presumably because they don’t have MSRs to rely on. But needless to say, interest rate volatility is killing MBS spreads and that is bad news for agency REITs like AGNC Investment.