This is Matt Graham with the MBS Live Market Update. Mortgage rates and bond yields moved lower almost every day last week, with most of the help coming from war-related headlines and then a last-minute boost from Friday’s jobs report. Rates, of course, are driven by bonds, and the bond market dynamic is surprisingly simple these days. Oil price volatility has been a constant source of inspiration during the Iran war, with rates generally moving in the same direction as oil prices and oil prices responding to various war-related headlines. Other considerations include usual suspects like big-ticket economic data and any notable updates from the Fed. Last week saw several positive developments in Iran, either related to the pace of fighting or the prospects for reopening the Strait of Hormuz. Oil prices responded accordingly, and bond yields, AKA rates, generally followed. One motivation for bonds that tends to come and go is that of corporate bond issuance, and this relates to large corporations issuing bonds. When they do that, they create pressures on the broader bond market through a variety of channels. One can be via rate lock selling, which is akin to a mortgage company locking a rate and hedging and selling MBS. It’s similar in the corporate bond issuance world because those bonds are often indexed to US Treasuries. The firms that are helping these corporations issue and sell these bonds are locking their rate via selling a certain amount of treasuries as a hedge. That treasury selling creates immediate selling pressure, but in addition, there’s also the simple fact of supply and demand. In other words, the new large corporate bond represents an alternative investment that can draw demand away from other parts of the bond market. Friday’s jobs report was certainly the most anticipated piece of econ data of the week, as it often is, and it was a little bit counterintuitive at times. Not at first, because non-farm payrolls fell much more than expected, coming in at negative twenty-three K versus the forecast for positive eighty K. There were some negative revisions to the previous month as well, and that caused bonds to immediately rally, as you would expect. But right when the number came out on MBS Live, we were talking about the fact that it probably wouldn’t result in a big, lasting rally due to the fact that the unemployment rate fell to four point one percent from four point two percent previously. Now, it’s more like the unemployment rate held steady by the time we consider the drop in the labor force participation rate. But nonetheless, this is a new regime when it comes to the labor market and specifically the labor force size and participation levels in that it does not take the traditionally normal amount of non-farm payrolls to sustain a level unemployment rate. That’s exactly why non-farm payrolls can be near zero and, in last week’s case, negative without a big jump in unemployment. And of course, there was no jump in unemployment last week. But bonds also probably got a little bit of a boost from the average hourly earnings falling to zero point one percent from zero point three percent previously. All told, it was a more downbeat than expected employment report, but not as downbeat as the non-farm payrolls number would suggest in and of itself. With that, it wasn’t a huge surprise to see bonds reverse course in the afternoon and give up some of those gains, but that was also a factor of higher oil prices in the afternoon As we begin the new week, the Iran war news cycle has shifted in the way it has typically been shifting recently, where we have a few days on, a few days off, things look good, things look bad. And in this case, Iran is saying that the Strait of Hormuz won’t go back to how it was before. Oil prices rose on that news, bond yields followed, and we’re starting the week at slightly higher levels, but still under the critical resistance ceilings set recently, specifically on July 31st and before that on May 19th, although we’re right in line with those May 19th levels currently. Econ data will once again be in extreme focus this week, specifically on Wednesday with the next installment of the Consumer Price Index or CPI coming out. Recall last month dipped into negative territory by a small amount, and that was for June’s data, and that had a lot to do with a drop in fuel prices. July, of course, reversed course and moved back toward higher levels, so the market will be curious to see what that did to inflation numbers. We’ll also get the Producer Price Index on Thursday and a few other economic reports throughout the week, but the only really notable addition will be Friday’s retail sales at eight thirty AM Eastern Time. That’s gonna do it for this week. Back to you.
Matt Graham, Founder and CEO, MBS Live
Matt began as an originator in 2002. He fell in love with the idea of following MBS in real-time but felt that existing products were only scratching the surface. Thus was born MBS Live in 2007, the first-of-its-kind platform with real-time market data/analysis, and live chat with analysts, traders, and originators around the country. He is currently the Founder and CEO of MBS Live!
He’s been covering bond/mortgage markets, writing commentary, alerts, and chatting with the live community every business hour of every business day ever since.
Matt also serves as the Chief of Operations for mortgagenewsdaily.com, where he is one of the industry’s most respected mortgage rate experts, frequently quoted in the media. Mortgage News Daily’s rate index is used as the definitive resource on day-to-day mortgage rate averages.
He lives in the Pacific Northwest with his wife and son where he enjoys skiing, fishing, coaching youth sports, playing the guitar, and more DIY projects/hobbies than he’d care to admit.