Friday – January 20, 2023

MBS down 11 bps early.

Bonds began the overnight session with minimal losses, but yields rose at a faster pace when European trading started.  There are no big-ticket events or headlines driving the weakness, but some comments suggest an improved covid outlook in China and higher oil prices are adding to the pressure.

Most signs are pointing to quarter point hikes by the Fed from here on out. The mixed signals complicate discussions over when to pause following an anticipated quarter-point rate increase on Feb. 1.

Also MANY different opinions on when the first rate drop (because of recession) will be. Investors and economists continue to doubt Fed forecasts that rates will rise to above 5% from their current level just below 4.5%.

Existing home sales fell 1.5% MOM and 34% YOY to a seasonally adjusted annual rate of 4.02 million in December.   The median existing home price rose 2.3% YOY to $366,900. That sound to me like all of the activity is at the lower price points. Total housing inventory for sale was 970,000 units. Unsold inventory is a 2.9 month supply, which is historically super-low. All-cash buyers were 28% of sales. First-time homebuyers represented 31% of all sales, which was an improvement from 28% Properties remained on market for 28 days.

Fannie Mae and Freddie Mac have updated their LLPA matrices. These will go into effect in May 2023. The main change is that Fannie and Freddie reduced the penalties for low credit and high LTV.

Bonds rallied to the best levels in months earlier this week but have been retreating since then.  At first, the retreat was gradual.  By Friday, it was a bit more pronounced, but still lacked any compelling scapegoats.  Earlier in the day, analysts pointed to China reopening after covid lockdowns.  Heavy selling in European bonds spilled over to Treasuries as ECB speakers struck a hawkishtone.  Traders also may simply have been squaring up positionsahead of a week with no Fed speakers and a round of Treasury auction supply.