Monday – March 20, 2023

MBS down 9 bps to start the week.

Treasuries hit their lowest yields since September right at the start of the European trading session as the UBS takeover of Credit Suisse was initially met with more doubt than relief. That trade gradually reversed as the European session continued. Yields ultimately broke even in the first hour of US trading before bouncing just slightly lower .

UBS will purchase Credit Suisse in a deal to (temporarily) end a crisis in confidence. The Swiss bank UBS is paying 3 billion francs ($3.3 billion) for its rival in an all-share deal that includes extensive government guarantees and liquidity provisions. The price per share marked a 99 percent decline from Credit Suisse’s peak in 2007. The Swiss National Bank is offering a 100 billion-franc liquidity assistance to UBS while the government is granting a 9 billion-franc guarantee for potential losses from assets UBS is taking over. Five years ago, CS still had a market cap of $45 billion.

Markets reacting to the Janet Yellen speech over the weekend.  Money is moving around after she said that, in the future, the gov’t is only going to protect “fully insured” deposits.  Well, unless they decide the bank failure would pose a systematic risk.   So clarified nothing.  This makes things tough for smaller banks.

There is also a lot of talk abut bank stress tests.   Apparently their definition of “stress” was a brisk walk on treadmill.  Their “worst case” was a .5% change and the 3 month treasury near Zero.

The Leading Economic Indicators report – measures 10 key areas of economy – came in at -.3% in Feb.  11th consecutive month of negative reading.

What’s also bad is the latest cost per loan figures released by the MBA. Total loan production expenses (commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations) increased to $12,450 per loan in the fourth quarter.   Independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks reported a net loss of $2,812 on each loan they originated in the fourth quarter of 2022.

If there happened to be some significant economic data today, or on the next two mornings, financial markets might wait to see what it implied before diving head-first into the pastime of overanalyzing Fed rate hike odds.  With essentially no relevant data between now and then, the task at hand is clear: get in position for the Fed (if you’re not already) and react to any major developments in the banking sector.  Monday’s early trading suggests markets are actually right about where they want to be after a bit of overnight volatility surrounding the UBS takeover of Credit Suisse.

Tuesday – March 21, 2023

MBS -.27 on the open. 10y is up 10 bps.

Bonds were moderately to sharply weaker in the overnight session, led by a risk-on trade in Europe. The absence of new drama in the banking sector allowed investors to take another step back toward levels of risk exposure that are still quite far away (German Bunds still roughly 50bps lower than 2 weeks ago). The emphasis on the risk-on ($ goes bonds > stock) trade was driven home by the fact that EU econ data was decidedly weaker–something that would otherwise result in bond buying as opposed to bond selling.

Fed starts it’s rate deliberation today with announcement tomorrow.

The Fed raises the Fed funds rate to tighten both financial conditions and lending standards. They in turn result in reduced lending and investment, which leads to slowing economic activity, and usually a recession. Since the SVB debacle, financial conditions and lending standards have quickly tightened, and by the equivalent of a staggering 150bps, more than the sum of the Feds last three rate hikes dating back to 11/2/22.

First Republic might get a capital injection. The Wall Street Journal reported that the consortium of banks that deposited $30 billion at the troubled bank are looking at converting those deposits into a capital infusion. The news (along with the Credit Suisse merger) has improved sentiment in all of the regional banks, including Western Alliance, PacWest and US Bank.

The FOMC starts its two day meeting today. The Fed Funds futures are forecasting a 80% chance of a 25 basis point hike. Overall, the Fed Funds futures are getting more hawkish as the market bets the banking crisis is over. That might be wishful thinking, but so far the markets are in a risk-on move.

Today’s trading session turned out to be every bit as simple as it seemed like it would be this morning.  Why so simple?  There were clear indications that improved sentiment in the banking sector was fueling a ‘risk-on‘ trading pattern in Europe (i.e. stock prices and bond yields moving higher together). This extended to US markets, but especially to Treasuries.  MBS actually outperformed, which isn’t too shocking considering Treasuries were the star performers when the market was trading in a risk-off direction.


Wednesday – March 22, 2023

MBS off 20 bps early…..again. It was a boring trading session in both Asia and Europe. The latter say a bit of an additional “risk-on” move with EU stocks and bond yields moving higher. The only difference is that US bonds weren’t as willing to follow EU bonds this time around.

Heading into the 9:30am NYSE open, 10yr yields returned to roughly unchanged levels at 3.61+ after being just over 3.64% overnight.

First Move After Fed is Mixed; Results as Expected

  • 25bp hike
  • no change in 2023 dots
  • 2024 dots slightly HIGHER (4.3 vs 4.1)

Bonds are currently slightly stronger than they were before the Fed announcement if you ask treasuries (10yr at 3.522).

Existing Home Sales rose 14.5% in February, according to the National Association of Realtors. This ended a 12 month streak of declines. Most notably, the median home price fell by 0.2% to $363,000. Prices rose in the Midwest and the South, while falling in the Northeast and the West. The number of homes for sale came in at 980,000 which represents about a 2.6 month supply at the current sales pace. This is indicative of a tight market; a balanced market is about 6 months’ worth of sales.

The first time homebuyer accounted for 27% of sales which is a pretty low percentage. First time homebuyers accounted for 26% in 2022, which was a record low.

Traders are now pricing in more interest-rate cuts by the Federal Reserve this year even as the central bank hiked its benchmark by a quarter-point and signaled that it expects more tightening after that.  The swaps market shows a bit more than a one-in-two chance

that officials will add another 25 basis points to their benchmark in May.

Treasury Secretary Janet Yellen said regulators aren’t looking to provide “blanket” deposit insurance to stabilize the US banking system, and that the heads of recently failed American lender should be held accountable.  Her staff is studying ways to temporarily raise the

federal insurance cap above $250,000 without Congressional approval in the event the crisis grows, Bloomberg News reported Monday.

Today promised to be one of the most interesting Fed days in a long time and it did not disappoint.  Despite a 25bp rate hike and an even worse dot plot than last time (Fed sees rates staying a quarter point higher in 2024 than they did before), bonds rallied fairly substantially.  This could have to do with a verbiage change in the statement that signified a potential shift in policy tightening or with Powell’s comments on banking issues acting as de facto tightening that prevents the Fed from needing to hike as much.  Last but not least, by saying banking issues will result in tighter credit conditions, Powell effectively told banks “hey… all your friends are going to be making fewer loans”

Thursday – March 23, 2023

UMBS are up 8 bps and S&P up 37 points.

Bonds began the overnight session drifting very gently stronger but began losing ground during European trading hours. Several central banks hiked rates as expected (thus no major reactions).

Yields were a few bps higher at the open and have risen another few bps after data, but not because of it. Rather, it looks like bonds were slightly spooked by a big corporate bond announcement and premarket gains in First Republic Bank (the current poster child for systemic banking concerns in the U.S.).

Jobless Claims= 191k vs 197k f’cast [192k prev]

The Fed cleared a lot up for the market yesterday by confirming that inflation still matters, but that systemic banking problems also matter. Powell pointed to the latter being like a free rate hike–i.e. something that helps deliver a tightening effect to the economy without the Fed actually having to hike rates. Markets took it as a potential turning point for rate hike urgency.

Bonds began the day in slightly weaker territory, but eventually turned green with help from a flight-to-safety in Europe.  A few hours later, US markets did the same thing, resulting in even better gains for Treasuries.  10s dropped under 3.40% and MBS gained more than an eighth of a point

The MBA’s forecast for 2023 volumes changed, and here’s the latest by the MBA on 2023’s originations: $1.8 trillion.

Intercontinental Exchange Inc. (ICE) and Black Knight Inc.file official responses to federal regulators’ bid to block their merger.


Friday – March 24, 2023

Wild morning on the bond market. MBS now down 2 bps. Though there was 26 bps of movement (both directions) to get here.

Back to “Zero Days” Without a Systemic Banking Contagion Flare-Up. While there’s not as much of an issue as something like Silicon Valley’s failure, the surge in Deutsche Bank CDS (credit default swap) got the market’s attention overnight. A credit default swap (CDS) pays out when a company defaults on its obligations. CDS spike well before a company officially goes under.

Deutsche Bank AG slumped 15%, the most since the early days of the pandemic in March 2020.

UBS Group AG shares dropped as Bloomberg reported that it’s one of the banks under scrutiny in a US Justice Department probe into whether financial professionals helped Russian oligarchs

evade sanctions, according to people familiar with the matter.

Domestic econ data (Markit PMI) came in a bit hotter and is not helping our cause. MarkIt PMI came in at 85.3 vs 47.5 Forecast (50.01 prev)

Durable Goods orders fell 1% in February. Ex-transportation they were flat. Both numbers were below consensus. Core Capital Goods orders (a proxy for business capital expenditures) were flat.

December Fed Funds Futures moved back to their recent lows, with 3.5-3.75% being the target (VERY different from what the Fed foresees). That discrepancy spells one thing in the weeks ahead: VOLATILITY.

St. Louis Fed President James Bullard spoke this morning. He refers to the current situation with the banks as similar to events in the past where rising rates caused financial stress, but didn’t tank the economy. He mentioned the Mexican Peso / Orange County crisis of the mid-90s, Continental Illinois in the mid 80s, and Long Term Capital Management in the late 90s as examples. The labor market remains exceptionally strong, however financial stress is increasing.

One picture is worth a thousand words, and here’s a nice chart of Fed Funds to help keep things in perspective.

Homebuilder KB Home reported first quarter numbers. Revenues were flat while gross margins contracted due to seller concessions and rising construction costs. Average selling prices rose 2% to $494,500.

Common Sources and influences






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