Mortgage rates are based on trading levels in the bond market and bond market activity has been extremely slow, as is normally the case during the Christmas holiday week.  The side effect of the slow activity is the risk of more random volatility.  In other words, bonds (and thus rates) can move in either direction (or in both directions on the same day) for no apparent reason.   Today was one of those “both directions” days. At the start of the day, bonds were at their weakest levels in months.  As such, it was logical to see mortgage rates begin the day near their weakest levels in months.  Fortunately, the worst was over early in the day and bonds improved steadily from then on out.   Mortgage lenders prefer to set rates once per day and they typically only change when bonds move enough.  Today’s improvement was enough for most lenders to make friendly adjustments by the afternoon.  After those improvements, the average lender was back near the levels seen on Tuesday, and slightly below last week’s highs.   Top tier conventional 30yr fixed rates continue to operate near the 7.125% mark.

Friendly Reversal Thanks to 7yr Treasury Auction

The day began as so many days over the past few months with bonds moving higher in yield for reasons that transcend the typical economic data or news headlines. The Christmas holiday week is particularly random in terms of directionality due to low volume and liquidity.  That ended up being beneficial today  with a strong 7yr Treasury auction resulting in a favorable imbalance between buyers and sellers.  Light liquidity/volume magnifies the impacts of such imbalances.  The result was one of the biggest reactions to a 7yr Treasury auction in several years.  That’s not  a high bar, but was nonetheless worth 4bps in 10yr yields and a move from weaker to stronger territory on the day.

Econ Data / Events

jobless claims

219k vs 224k f’cast, 220k prev

Continued Claims

1910k vs 1880k f’cast, 1864k prev

Market Movement Recap

08:35 AM Moderately weaker overnight and little changed after data.  MBS down 6 ticks (.19) and 10yr up 4.9bps at 4.634

11:54 AM recovering somewhat.  MBS down 1 tick and 10yr up 2.6bps at 4.611

01:05 PM MBS now 1 tick higher after strong 7yr auction.  10yr yield up only half a bp at 4.59

03:14 PM Holding near best levels with MBS up an eighth and 10yr down nearly 1bp at 4.578

Mortgage rates should decline very gradually next year as the Federal Reserve will keep to its implied path of short-term rate reductions, Freddie Mac said.

Companies’ new uses for AI, regulators’ responses to past cyber incidents and wider acceptance of digital collateral were among the year’s top developments.

The Bank Policy Institute, the American Bankers Association and others said proposed changes would address “some if not all” of banks’ concerns about stress tests, but they are filing the lawsuit to preserve their legal right to do so.

Separate forbearance and government-sponsored enterprise delinquency indicators both reached relatively high levels for the year, but not for the same reason.

The complaint claims over 50 class members and it alleges potential damages exceeding $5 million from the bank.

Bonds are selling off for no obvious reasons for however many days in a row it’s been (at least 2 unless you count last Thursday). Episodes like this result in bond analysts dusting off phrases like “the path of least resistance”–typically only ever seen with selling pressure.  This path arguably began in early December after the jobs report failed to push 10yr yields sustainably below 4.17. One could even say it began with the jobs report in early October that singlehandedly obviated any urgency on the part of the Fed to address some sort of troubling slide in the labor market.  At the very least, the most recent leg of weakness can be thought of as the path of least resistance in light of last week’s Fed announcement/dots/press conference. 
The act of pushing the rate cut outlook farther into the future and/or of declaring a higher neutral rate is consistent with “steepening” of the yield curve.  That’s a fancy word that means 10yr yields are moving higher relative to 2yr yields, or that 2yr yields are falling faster than 10yr yields.

Bottom line, there was a chance that a floundering labor market would accelerate the rate cut outlook, sticky inflation be damned.  October’s release of NFP meant that the focus could shift back toward sticky inflation, and subsequent inflation reports confirm there’s no reason to rush additional hikes.  Combine that with some unknown risk that fiscal changes continue to juice the economy and we’re right back to the “higher for longer” mentality that dominated the discourse last year.
Don’t lose hope though.  Things can change, but it will take a noticeable shift in the inflation data, or another troubling swoon in labor metrics.  Either way, the path of least resistance can’t really change until we actually get those reports in the first 2 weeks of January, and even then, it would take a few months in succession to really make a case for a shift. There’s also some hope from the outright level of yields, which began to bring out value buyers the last time 10yr Treasuries moved into the upper 4% range.
(NOTE: MBS Live is on holiday half-day protocol today.  That means this morning’s commentary is also the closing commentary unless something really crazy necessitates additional coverage.  Updates/alerts will only go out in the event of extreme movement. As always, MBS Live members can set up multiple automated alerts (here) if you’re actually making intraday lock decisions today.)

In the news, besides American Airlines grounding all flights (it’s back running now), is Burt, the 90-year-old crocodile from Crocodile Dundee, dying yesterday in Australia. My guess is that he’s long retired from doing much of anything. What do retired mortgage bankers do, besides immediately considering re-entering the business? Here’s one solution from Minnesota. Others travel. Millions sit down in their fancy seats and start flipping through the movies on the screen in front of their nose. Where do they come from? (The movies, not the noses.) Small teams at the airlines make decisions on what gets added to the library. Delta has a team of four that decides what gets onto 165,000 screens on 840 jets, Southwest has a single person picking what makes it onto their media servers, United has a team of eight picking what goes on in the 500 planes where it has seat-back screens. American carries 1,500 titles overall and averages 500 movies and tends to add 200 new titles a month. The best/most popular airline movie (yes, they watch what you watch) is Crazy Rich Asians.  Employment; lender wanted “Evergreen Home Loans® is seeking to acquire a midsized mortgage company that shares our values and commitment to exceptional customer service. With over 37 years of experience, Evergreen is dedicated to helping homeowners achieve their dreams through innovative loan products and a people-first approach. We will take care of your Loan Officers and provide them with the tools to succeed, creating an environment where they can thrive. This acquisition is an opportunity to join forces, combining strengths to achieve lasting success and expand our reach. All inquiries will be handled confidentially. If your company is interested in exploring this opportunity, please contact Evergreen’s founder, Don Burton, directly. (206.300.9965) Let’s build a stronger future together!”

The watchdog accuses Rocket Homes and The Mitchell Group brokerage of initiating a plan to generate origination business for Rocket Mortgage.