Uneventfully Flat After Initial Weakness

The bond market only had a little more selling to do thanks to the unpleasant tailwind from Wednesday afternoon’s Fed press conference. That said, one could also argue that corporate bond issuance was the source of early weakness.  Either way, yields are now back where they would have been in lieu of the Oct 10th tariff announcement and the Oct 16th regional bank drama (the two biggest recent events that pushed them lower).  Fed rate expectations for the December meeting are worse off–nearly back to levels seen BEFORE the jobs report that came out in early September. This highlights the extent to which the market was overestimating the near-term rate cut path. What next? More of the same: waiting for data that won’t be reported and making do with available private data. 

Market Movement Recap

10:07 AM mostly flat overnight with some additional selling starting just before the open.  MBS down 3 ticks (.09) and 10yr up 2.4bps at 4.096

12:52 PM Decent recovery.  MBS unchanged and 10yr up only 1.4bps at 4.085

03:20 PM 10yr yields are still off the morning highs, but up 2.3bps at 4.095.  MBS down 2 ticks (.06) on the day and 6 ticks (.19) from the highs.

The simplest way to understand yesterday’s post-Fed sell-off is as follows. The market’s enthusiasm for 3 Fed rate cuts in 2025 had grown a bit too large for the Fed’s liking. The market was nearly 100% certain of another cut in December. The Fed was not as certain, and Powell made it a point to say so yesterday. The result is a mild re-set in yields back to levels that are more consistent with a December cut being a solid possibility, but not a full lock.  Now we wait to see if the non-gov econ data tips those scales in one direction or the other.  This morning’s additional selling is an acceptable and arguably inconsequential level of follow-through to the brunt of yesterday’s “reset” vibes.

In terms of specific Fed rate expectations:

Of the 15 states most affected by natural disasters, California and Florida had the highest non-renewal rates in 2024, a Weiss Ratings study found.

The Federal Open Market Committee voted to reduce interest rates by 25 basis points Wednesday, but the emergence of dissents on the committee makes the chance of another quarter-point cut in December less certain.

An index of contract signings held at 74.8 after climbing a revised 4.2% a month earlier to the highest level since March, according to National Association of Realtors data released Wednesday.

The deal will help drive development at Mortgage Cadence, which had been a unit of Accenture, and enable new integrations and automation, according to leaders.

Mortgage groups want GSEs to buy MBS to lower rates, but the Chairman of Whalen Global Advisors writes that the plan is risky, unnecessary, and poorly timed.

Another Hawkish Powell Press Conference Harshes Bonds’ Mellow

The Fed cut rates and ended QT.  Neither were surprises for markets and neither had an impact.  The press conference was hawkish, however, with Powell saying a December cut was far from a foregone conclusion.  This is very much counter to the market’s expectation that a December cut was a lock.  Fed Funds Futures tanked and yields surged about 8bps in the 10yr.  MBS lost about 3/8ths and negative reprices continue to roll in.  

Econ Data / Events

Case Shiller Home Prices-20 y/y (Aug)

1.6% vs 1.9% f’cast, 1.8% prev

CaseShiller 20 mm nsa (Aug)

-0.6% vs — f’cast, -0.3% prev

FHFA Home Price Index m/m (Aug)

0.4% vs 0.1% f’cast, -0.1% prev

FHFA Home Prices y/y (Aug)

2.3% vs — f’cast, 2.3% prev

CB Consumer Confidence (Oct)

94.6 vs 93.2 f’cast, 94.2 prev
Labor differential: 9.40 vs 7.80 prev

Market Movement Recap

10:26 AM modestly weaker overnight and holding steady so far.  MBS down 1 tick (.03) and 10yr up 1.6bps at 3.992

01:28 PM 10yr yields are up 2.9bps at 4.005 and MBS down 3 ticks  (.09)

01:41 PM MBS now down 5 ticks (.16) and 10yr up 3.5bps at 4.012

Today was not a foregone conclusion and there was no way to know ahead of time that it would end like this, but the outcome is exactly why we’ve gone to such lengths to warn you about the potentially paradoxical reaction to a Fed rate cut.  Too many people repeat the fallacy that mortgage rates will benefit from a Fed cut.  We have several recent examples of the exact opposite happening, and now today adds another strong reminder with the average lender moving higher at the fastest pace since the day after the last Fed meeting. Why does this happen?  It has nothing to do with the rate cut itself.  As we warned, volatility would come from Fed Chair Powell’s press conference. In today’s case, Powell said that another rate cut in December was not a foregone conclusion.  This was at odds with the market’s expectations, so there was a rush to reprice those expectations.   As always, today’s rates instantly adjust to expectations for rates in the future (the main reason that Fed rate cuts do little-to-nothing to impact market rates).   In relative terms, rates are still lower than most of the past year, but back up to similar levels seen on October 14/15th. 

While Rocket Mortgage’s satisfaction score improved by 4% versus 2024, the industry as a whole dropped 1%, with credit unions outpacing banks and IMBs.