At the start of the domestic session, bonds had actually managed to build on last week’s impressive gains, even if only by a few bps. That was a bit of a revelation as we didn’t know how much credit to give “defensive positioning ahead of a 3 day weekend” for a portion of those gains. Now that we’re a few hours into the trading day, the early gains have evaporated, but not in an overly-alarming way. Barring unexpected headlines, it looks like bonds will be able to digest the Wednesday’s Fed minutes from well within the confines of a 4.0-4.10% range in 10yr yields.

Federal Reserve Vice Chair for Supervision Michelle Bowman said in a speech Monday morning that the central bank will introduce two capital proposals that she said are aimed at boosting banks’ role in the mortgage market.

The Public Interest Law Center filed an amicus curiae brief arguing against a joint motion to end a redlining agreement early against Lakeland Bank.

Fannie Mae and Freddie Mac will add loan-level buydown data to MBS this spring, giving investors clearer insight into prepayment risk tied to temporary rate incentives.

The mortgage broker trade group put out a white paper calling for lowering transaction costs, increasing housing supply and reducing regulatory barriers.

Mortgage delinquencies increased across loan types, and while 30-day late payments showed overall improvement, later-stage distress worsened.

The 5-year yield swung sharply after conflicting BLS jobs and CPI data, with softer inflation boosting rate-cut hopes, according to the CEO of IF Securities.

The Bureau of Labor Statistics released its January Consumer Price Index Friday, showing that inflation rose 0.2%, while the annual rate eased to 2.4% after holding at 2.7% for several months. The data reduces the likelihood that the Federal Reserve will cut interest rates in the near future.

Bonds Close Out Epic Week of Resilience With Friendly Data

Friday was a logically friendly day thanks to slightly lower CPI. But no matter what happened on any of the other 4 days, this week was all about bonds ending up at much stronger levels in spite of a jobs report that should have sent rates higher on Wednesday. Ironclad justification remains impossible, but the leading theory involves heavy liquidation mode in stocks/commodities on Thursday. Holiday weekend positioning could also be a factor. As such, we’ll learn a lot more next Tuesday–especially if stocks find a reason to stage a big bounce. 

Econ Data / Events

m/m CORE CPI (Jan)

0.3% vs 0.3% f’cast, 0.2% prev

m/m Headline CPI (Jan)

0.2% vs 0.3% f’cast, 0.3% prev

y/y CORE CPI (Jan)

2.5% vs 2.5% f’cast, 2.6% prev

y/y Headline CPI (Jan)

2.4% vs 2.5% f’cast, 2.7% prev

Market Movement Recap

12:45 PM Stronger After CPI and sideways since then. MBS up roughly and eighth and 10yr down 4bps at 4.06

01:52 PM Losing ground modestly.  MBS still up 2 ticks (.06) and 10yr still down 3.5bps at 4.066

02:58 PM MBS up an eighth and 10yr down 4.7bps at 4.053

When the administration announced that Fannie and Freddie would be buying mortgage-backed securities in early January, rates fell sharply to the lowest levels in more than 3 years. After a moderate rebound the following week, we’ve been holding mostly steady in a range that was 0.1-0.2 above those long-term lows. The past two days have brought enough improvement that the average lender is once again at levels that are close enough to the long-term lows seen on January 9th and 12th. What accounts for the strength? In today’s case, incremental gains were driven by a tame reading in January’s Consumer Price Index (CPI), a key inflation report. In general, lower inflation coincides with lower rates, and today’s reading was slightly lower than expected.