Sleepy Pre-Fed Day, But Slightly Stronger

Bonds did something they haven’t done in almost 3 weeks today. They closed at stronger levels for the second consecutive day. The last time that happened was February 27th at the end of the impressive month-long rally. While today was stronger, it wasn’t exactly impressive (or event that interesting). The most notable development was the fact that bonds rallied despite slightly higher oil prices. This is the opposite dynamic from certain moments last week where bonds underperformed a 1:1 correlation with oil. 

Econ Data / Events

NY Fed manufacturing

-0.2 vs 3.2 f’cast, 7.1 prev

Market Movement Recap

08:27 AM initially weaker overnight, then steadily stronger. MBS up 3 ticks (.09) and 10yr down 1bp at 4.21

12:32 PM Near best levels. MBS up 5 ticks (.16) and 10yr down 3bps at 4.19

02:48 PM Off best levels. MBS up 3 ticks (.09) and 10yr down 1.9bps at 4.20

Until the end of the Iran war, bond traders are keeping oil prices on their screens and comparing oil price movement against bond market movement as the first task on the daily checklist. In so doing, we see a bit of outperformance on the part of bonds this morning. While there is solid directional correlation (i.e. yields and oil were moving in the same directions at the same times), bond yields are lower today while oil is still a bit higher. Surprisingly, today’s highest minute of volume happened with the 8:15am ADP data which showed its biggest drop in months. That said, there was not a big reaction in yields. The easiest conclusion for now is that bonds are taking some solace in an absence of big, new surges in oil prices as well as some supportive cues from the 4.30% bounce seen last Friday.

Trump’s mortgage deregulation order drew cautious praise from lenders but alarm from consumer groups, who warn it could recreate pre-2008 financial crisis conditions.

The real estate investment trust said it needed more time for shareholders to vote in favor of the transaction, following speculation it was in trouble.

Hale Capital Management purchased Voxtur Analytics after a tumultuous past few years that included financial struggles, and rebranded it as Apex Analytics.

The deregulatory executive order, which pairs with another targeting small players’ home loan rules, impacts the FHFA, HUD and other agencies.

A coalition of Democratic attorneys general, led by California and Illinois, have sued the Department of Housing and Urban Development over a guidance that they argue will scale back enforcement to strict federal standards and threaten state funding to enforce fair housing laws.

Mortgage rates are based on bonds, and bonds spent last week bracing for the impact of higher energy prices. In the bond world, higher inflation begets higher rates, all else equal.  Oil prices remain elevated, but fell more than 5% on Monday. The bond market responded with a drop in Treasury yields (which generally correlate with mortgage rates). Both the 10yr Treasury yield and the average top-tier 30yr fixed mortgage rate fell 0.06% on the day. That means mortgages are now at the highest levels in only 3 months after being at 7-month highs on Friday afternoon.  [thirtyyearmortgagerates]

Simple, Strong Correlation With Oil Leaves Yields Lower

There’s no sense in overcomplicating today’s trading session. Oil was down significantly and so were bond yields. The correlation was very strong after 4am ET with each major peak and valley aligning. Econ data was present, but not a relevant consideration for trading. Stocks were also part of the correlation game but in a perfectly inverted way (peak in oil/yields = valley in stock prices). In other words, both sides of the market remain transfixed by energy prices. This hasn’t been the exclusive market mover in March, but it’s definitely been the dominant consideration, and that was double true today.

Econ Data / Events

NY Fed manufacturing

-0.2 vs 3.2 f’cast, 7.1 prev

Market Movement Recap

08:37 AM Moderately stronger overnight with additional gains in early domestic trading. MBS up a quarter point and 10yr down 4.6bps at 4.232

12:22 PM MBS still up a quarter point and 10yr down 4.1bps at 4.237

02:56 PM Best levels of the day with MBS up 11 ticks (.34) and 10yr yields down 6bps at 4.218

With no massive escalation in Iran over the weekend, oil prices trickled only modestly higher during Asian trading hours and began to recover during European hours. Early domestic trading kept the friendly trend intact with some help from Trump comments that suggested a limited timeline for the war. That said, the rally was more of a linear trend this morning and less of a volatile reaction to any individual newswire. Econ data is in the back seat to geopolitical events. The same will generally be true for Wednesday’s Fed announcement, although volatility is at least possible thanks to the dot plot and press conference (rate cut = 0% chance).

NOTE: you will never see a true 0% chance in terms of probability implied by futures contracts due to the structure of that market, but 99% = 100% and 1% = 0% for all practical purposes.