Wednesday – February 1, 2023
MBS up 9 bps on the open. 10y down 7 bps.
Bonds were almost perfectly flat in Asia, then slightly stronger in Europe. Notably, EU bonds pulled back into negative territory early this morning while US yields remained a bit lower.
The ADP data clearly delivered a jolt of volume and a smaller jolt of directional trading. All in all, the move was worth less than 3bps in 10yr yield terms, but it was in the right direction.
ADP Employment= 106 vs 178 f’cast [253 prev]
Most of the growth came from the hospitality industry which added roughly 95,000 positions.
Job openings and labor turnover survey (JOLTS)= 11.012 vs 10.44 mln prev
Pay growth was 7.3% for job stayers and 15.4% for job changers. Leisure and hospitality saw increases of 10% and was the outlier compared to all the other sectors which were bunched between 6.6% and 7.9%. This is something that will bother the Fed, as “services ex-housing” is their target for inflation reduction. The youngest cohort (ages 16-24) saw the biggest increase as well.
We were pretty sure we knew what Powell would generally say in today’s press conference. He turned out to be generally predictable. After all, there are really only two things the Fed can think or say right now: A) still need to see more progress on inflation and B) data will determine when our job is done. Despite Powell’s unsurprising comments, the market was apparently surprised (or relieved?). This is surprising considering the simple list of routes in the Fed playbook. Perhaps it’s as simple as the market being overly prepared for a Hawkish smackdown from Powell and instead getting a logical approach.
The spread between mortgage rates and the 10-year Treasury has been abnormally wide since early 2022. Further narrowing of that spread is expected to put downward pressure on mortgage rates in the coming months.
We did get some info on MBS spreads yesterday courtesy of AGNC Investment, a mortgage REIT which announced its fourth quarter results.
Mortgage REITs invest in mortgage backed securities, and they are often the buyer of the Fannie / Freddie securitizations. Think of them as the ultimate “lender” for your production. For the past year, the mortgage REITs have been reporting declines in book value per share as MBS spreads have widened – in other words MBS have fallen in value with interest rates, and the hedges mortgage REITs use have not increased in value enough to make up for the losses. This looks like it finally reversed in the fourth quarter.
This spread increased significantly in 2022, which has exacerbated the increase in mortgage rates from 3.27% to 6.66%.