Tuesday – November 12, 2024
Dangit! UMBS down 36 bps on the open. S&P futures down 5 points.
In the run up to the election, we offered constant reminders that a 10bp move in Treasuries wasn’t really a big deal, and that such volatility could be expected well into November. That’s the first way to view the overnight weakness. In fact, it’s almost perfectly central to the prevailing trend, and the previous 3 trading sessions look like the more volatile reaction.
Consider that there was a good amount of short covering (bond sellers becoming buyers to close their positions and book profits) after the election, and likely a push to get through it by Friday. That would leave today as a “back to business” day.
The other way to view this morning’s selling is as an organic response to Trump cabinet appointees and the increased likelihood of GOP control of the House. We maintain that such a thin margin of control is not quite as big of a deal as 10+ seat margin, but it’s worth a bit of bond weakness nonetheless.
This leads to the feeling that the supply of US agency mortgage-backed securities (MBS) may drop further with the results of the 2024 US elections. Net MBS issuance, already near decade lows, may decline even more as homes become even less affordable, especially for first-time home buyers. MBS for new builds may also drop as completions slow.
Small Business Optimism improved in October, according to the NFIB Small Business Optimism Survey. The index rose 2.2 points to 93.7. This is the 34th consecutive month below the 50 year average. One area of concern is sales growth: the number of small businesses reporting higher sales was a net negative 20% – in other words the percentage of business owners reporting higher sales was 20% lower than those reporting lower sales.
Rents were flat nationally in October, according to Redfin. Rents rose 0.2% on a year-over-year basis and fell 0.6% on a monthly basis. We have been going through a boom in multi-family construction, which really went vertical post-2020. These units are now being rented out, and that is putting some downward pressure on rents.
Bonds sold off on Tuesday both during the domestic session and in the overnight hours leading up to it. Motivations are a matter of conjecture as there is not a conveniently obvious scapegoat. That hasn’t stopped journalists, analysts, and traders from chiming in. The resulting laundry list mostly includes political considerations ranging from specific revelations regarding cabinet appointees to generalizations about the market continuing to process fiscal implications.
We’d certainly add a high likelihood of positional considerations with last Thu/Fri now looking very much like an opportunity to cover shorts (makes yields move lower) and get neutral ahead of the 3-day weekend before getting yields back in line with post-election highs today.
UMBS closed the day down 58 bps, at 98.93