This is Matt Graham with the MBS Live market update. Last week was not a great one for the bond market with yields ultimately closing at the highest levels in many months and moving sharply higher on the last three days of the week, especially things started out well enough with moderate gains on Monday and Tuesday. There was not much data in the background there, but oil prices were holding steady and actually making modest gains at times, especially on Monday morning. But, Wednesday got things going in the wrong direction. It started PPI of all things the producer price index, not a report that normally has a big impact on the bond market, even when it comes in much higher than forecast, which it did again this time, but the way that it came in higher had more translation to PCE prices. That’s the personal consumption expenditure price index. The more broad and, more highly regarded report that comes out later in any given month, and certain components of both the CPI and PPI reports correspond with components of the PCE data and traders track those and inside the PPE report last week, those particular components pointed toward higher PCE inflation and accounted for a little bit of upward pressure in treasury yields and mortgage rates. Later in the same day, oil prices began to rise and put a little upward pressure on rates, but it was the Fed announcement and specifically the Fed’s press conference that really did the trick. Fed Chair Powell during his press conference said it was too soon to even focus on oil prices as a potential inflation shock, and the Fed was still looking for a reduction in goods prices relating to tariffs before it would be able to consider rate cuts. He also said in the dot plot there was a meaningful shift toward fewer rate cuts, even though the end of year targets remain unchanged. And he said they have not seen the progress they hoped for and has been disappointing when it comes to the inflation progress needed to consider rate cuts. While he said that rate hikes were not the base case, he also said that they could not be ruled out. And this is a theme that would continue later in the week among other central banks that approved very problematic for the bond market. Specifically. Thursday morning we got both Bank of England and ECB holding rates steady. No talk of rate cuts. That was a big shift. Markets moved rapidly to reprice expectations for the rate outlook. In both of those Countries, well one’s not a country, but the entire EU. And this was a big shift. Previously it had been thought that one of those two central banks would be sort of leading the charge globally on cutting rates. But things are particularly problematic in the EU and UK because they import much more of their energy than the US. So with rising oil prices, they have more to consider when it comes to inflation shocks stemming from the war in the Middle East and then on Friday, snowball selling continued UK bonds moved to their highest yield since 2008. EU highest since 2012. Oil prices started rising yet again. US ten’s highest since August and the sense of generally what we were refer to as snowball selling where positions get stopped out and the next trader in line sees the higher yields. Their stop loss levels are hit. They have to sell, creating more stop loss levels for the next trader in line, and you get a snowball effect until all of the potential selling has sort of run its course. I guess that did not actually happen because there was more selling in the overnight session all the way up to roughly 7:00 AM Eastern time. By that time this morning, 10 year yields were 4.44%, another multi-month high. But then a few moments later, there was an announcement by President Trump regarding a five day ceasefire or a five day moratorium on strikes on certain parts of Iran’s infrastructure and a reference to conversations with leadership in Iran about winding down the war in some way while there have been contentions that those talks haven’t happened and some back and forth as to how they happened and who they happened with. The market is trading it as if something good is going on with respect to deescalation, and that has treasury yields sharply lower from 4.44% all the way down to 4.32%. Currently fairly big rally stocks are up. Sharply as well oil prices are down sharply all the way back to levels from March 11th at this point. So the market is definitely sensing some winds of change when it comes to the war in the Middle East and will continue to monitor that situation throughout this week as the most meaningful and most likely market mover, not just for bonds, but for all the other markets mentioned as well. 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.