MBS up 5 bps on the open. Stocks up a bit
Bonds lost ground the moment overnight trading opened on Sunday night owing to a quick surge in oil prices (driven by an OPEC supply cut). Crude-oil futures advanced 6%, the most in almost a year, after the oil cartel announced an output reduction of more than 1 million barrels per day.
In the slightly bigger picture, this returned oil to levels seen before the Silicon Valley Bank failure. After the initial losses, bonds have been sideways to slightly stronger.
The manufacturing economy contracted in March, according to the ISM Manufacturing Survey. Supply chains are now ready for growth, as panelists’ comments support reduced lead times for their more important purchases. Price instability remains, but future demand is uncertain as companies continue to work down overdue deliveries and backlogs. Seventy percent of manufacturing gross domestic product (GDP) is contracting, down from 82 percent in February.
Sentiment around the Fed rate policy is slowly shifting (in the wrong direction for better rates) as more time passes and the banking drama from a couple of weeks ago doesn’t appear to be as systemic as some chicken little voices would have everyone believe. It’s hard to expect rates to make any significant improvements this week ahead of a very dangerous jobs data on Friday
More evidence that the bank deposit run of a few weeks ago is abating. Raymond James points out that smaller banks are gaining deposits. Overall, deposits did fall, but they came out of the larger banks and the foreign-domiciled ones.
The jobs report on Friday will be the big event for the week, along with the ISM data. The bond market will close early on Friday.
FHFA is making the COVID-era six month deferral permanent, allowing borrowers to skip up to six monthly payments and then tack them on to the end of the mortgage.
For agency mortgage bond investors the hits keep coming and the month of March was a hard kick in the teeth for the sector. The US MBS index excess return came in at -1.11%, the worst performance seen for the month of March in the index’s history, easily besting (worsting?) the former record low for the month seen in 1994, when the index tallied -0.97%. The litany of negative headwinds for the sector could form a conga line of bad news — the Federal Reserve remains on the warpath against inflation, even raising rates another 25 basis points at the last meeting despite the stress seen in a banking system that is sitting on a mountain of unrealized losses amid rising rates.
Throw in some volatility (as investors and the Fed disagree over what monetary policy will look like in the second half of the year), add a dash of potential agency MBS sales by the FDIC, garnish with continued hawkish rhetoric from Fed speakers and than mix in an inflation rate that (using the Fed’s favored PCE) remains well over twice the target and you’ve got yourself a wall of worry.