Bonds Seek Lower Yields, But not Too Deeply Yet

On Friday night, a vast majority of market watchers had never heard of the Chinese AI company DeepSeek. By mid morning today, it was all a vast majority of market watchers could talk about.  DeepSeek’s list of accomplishments includes: much lower cost than ChatGPT, similar competence to ChatGPT, and just in the past 24 hours, rising to the top of Apple’s free app download chart. All of the above added up to some sort of real or imagined wake up call for investors on the real or imagined overvaluation of NVDA and the like. NVDA saw the biggest daily decline in market cap in history (something it’s done several times due to the uncommon combination of its size and volatility). All of that money needed a home, and there was plenty of room in the bond market. Either that or investors were legitimately hedging against ongoing impacts. Either way, it’s far too soon to conclude that this is the moment in history where the bond market knew that rates had finally turned a corner to head much lower (something that still requires disinflation confirmed with data, preferably in conjunction with lower Treasury issuance and softer econ data).

Econ Data / Events

New Home Sales

698k vs 670k f’cast, 674k prev

Market Movement Recap

09:54 AM Sharply stronger overnight, but giving back some gains.  MBS up a quarter point and 10yr down 8.3bps at 4.546

02:01 PM Some volatility, but broadly sideways since the open.  MBS up 10 ticks (.31) and 10yr down 9.2bps at 4.537

03:25 PM MBS near best sustainably held levels, up almost 3/8ths.  10yr down 10.2bps at 4.528

NVDA has obviously been THE biggest driver of prevailing bull market in stocks. In 2024, its market cap increased by just over 2 trillion dollars. Following relatively viral overnight news regarding China’s DeepSeek AI, NVDA is currently on track to obliterate the record for the worst day of losses for any stock, ever.  NVDA already held the first 5 records on that list.  In other words, a big sell-off in NVDA is a big deal for markets.  Whether it’s money looking for a safe place to park or investors changing strategy in light of the news, bonds have been reaping the rewards.  At this point, this should not be viewed as a sustainable source of positive momentum for bonds. Today’s move already looks to have run its course.

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If the GSEs are privatized with only their current capital levels, respondents indicated risk premiums on MBS would widen by as much as 45 basis points or more.

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Half of the underlying support for the token in the investment property sale of a Honolulu condominium will be backed by the borrower’s cryptocurrency.

Paying off debt and making home repairs are the top reasons homeowners choose a cash-out refinance, per the bureau’s report.

It’s no mystery that 2024 hasn’t been a stellar year for home sales and many other housing metrics. Today’s release of December’s Existing Home Sales from the National Association of Realtors (NAR) confirmed that.   Bad news first: with December in the books, 2024 goes down as the worst year for existing sales since 1995, just barely edging out 2008.3 The good news is that 2024 is over and we ended the year on the upswing in terms of month-to-month and year-over-year momentum. In addition to 3 straight months of improvement and the best sales pace since February, December’s annual pace of 4.24m is 9.3% higher than last December and the largest annual increase since June 2021 (to be clear, the 12 months in 2024 added up to the lowest level of any year since 1995, but this month’s pace was the best since mid 2021 when compared to the same month from the previous year). “Home sales in the final months of the year showed solid recovery despite elevated mortgage rates,” said NAR Chief Economist Lawrence Yun. “Home sales during the winter are typically softer than the spring and summer, but momentum is rising with sales climbing year-over-year for three straight months. Consumers clearly understand the long-term benefits of homeownership. Job and wage gains, along with increased inventory, are positively impacting the market.” full release…

While there were only 4 business days instead of the customary 5, it’s been an intensely boring week for mortgage rates.  Tuesday started out right where Friday left off. From there, Thursday brought the only noticeable change with the average lender moving up to the highest levels in just over a week. Friday saw a return to the boring trend with an almost imperceptible improvement, splitting the difference between yesterday’s highs and Tue/Wed lows.   The day began with rates almost perfectly in line with Thursday’s, but a favorable reception to today’s economic data fueled an improvement in the bond market. This allowed a number of mortgage lenders to make positive adjustments in today’s rate offerings, modest though they may be. Rates (and the underlying bond market) have been relatively starved for actionable economic data this week.  That will begin to change as next week brings a more active calendar.  It continues to the case that rates will have a hard time improving in any major way unless the data shows a clear contraction in growth and continued progress on inflation.

Modest Gains Make For an Uneventful Week

If bonds had continued to sell off today, it would have made the week slightly more interesting, but even then, we would still be well under the high yields seen last week.  As it stands, the combination of this morning’s economic data and an undetermined source of inspiration a short while later left bonds in modestly stronger territory, thus making for a very flat week in the bigger picture.  This is neither bad nor good, and also not a huge surprise given the very light data calendar.  There are bigger-ticket events in the week ahead, including a Fed announcement (just tuning in for the press conference), GDP (1st look at Q4), and PCE inflation. 

Econ Data / Events

S&P Services PMI

52.8 vs 56.5 f’cast, 56.8 prev
prices and employment moved higher

Consumer Sentiment

71.1 vs 73.2 f’cast, 74.0 prev
1yr inflation: unchanged
5yr inflation: down 0.1

Market Movement Recap

10:02 AM Modestly stronger at the open, but slightly weaker after data.  MBS down 1 tick (.03) and 10yr up half a bp at 4.647

10:48 AM Bouncing back now.  MBS up 3 ticks (.09) and 10yr down 1.3bps at 4.629

01:51 PM Off the best levels, but still up an eighth in MBS and down 1.3bps in 10yr.

04:26 PM Moving back toward stronger levels into the close.  MBS up 5 ticks (.16) and 10yr down 2.4bps at 4.618