Fed Meeting Breakdown, Taper Cometh

Home loan rates ticked up and had a bit of a "taper tantrum" after the Fed meeting on Wednesday when Fed Chair Powell outlined the case to scale back or "taper" bond purchases. Let's break down what was said and what to look for in the weeks ahead.

"All my bags are packed, I'm ready to go" - Leaving on a Jet Plane by John Denver

"Asset purchases still have a use, but it is time to taper them." – Fed Chair Jerome Powell...Sept 22, 2021

The Fed has been purchasing $120B worth of Treasuries and Mortgage-Backed Securities since March 2020 to stabilize the financial markets and help pin down long-term rates. This effort has helped fuel the frenzy in both purchase and mortgage refinance activity.

On Wednesday, during a press conference, Fed Chair Powell made it clear that the days of bond-buying are coming to an end and the scaling back of purchases may start before the end of the year. Here are some important quotes from the press conference:

"There is very broad support on committee for timing and pace of taper"

This is important as Fed Members are in alignment on the issue to taper, which means there is a good chance it is going to happen soon.

"There are some who would have preferred to go sooner due to financial stability concerns."

This line highlights the fear that some Fed Members have of inflation/price instability that comes with too much money in the financial system.

"Wouldn't put too much on inflation remaining above goal in Fed's current outlook."

However, Fed Chair Powell and most of the Fed believe the current high levels of inflation will be transitory or short-term in nature. The Fed forecasted Core inflation dropping down to 2.3% next year, which would be right in the Fed's sweet spot. If inflation moderates to those levels, interest rates may not be pressured higher, which allows the Fed to scale back bond purchases.

"Completing taper sometime around the middle of next year will be appropriate."

And for the first time, we have a timeline. The Fed is looking to scale back $120B a month in purchases to zero by mid-2022.

What's next? Mark your calendar as the next Fed meeting is Wednesday, November 3rd...that is the day markets feel the Fed will announce the taper start if they want to complete the tapering by mid-2022.

For the Fed to make a taper announcement in November, we likely need to see more progress on the labor market, which means the September Jobs Report, being reported Friday, Oct 8th is a big deal. If that report is solid, expect the Fed to make the announcement. If the report stinks, as some have of late, the Fed may not announce the taper.

Other unknowns which might delay a taper announcement include the debt ceiling negotiation, infrastructure debate, and signs of Chinese property bubbles losing air.

Bottom line: Now we know the Fed wants to taper and it may come as soon as November. This means it is very difficult for rates to improve much if at all from here. So, if you or someone you know is considering a new mortgage, now is an incredible time.

Looking Ahead

We know the next Jobs Report on Oct 8th carries huge significance. But next week there is plenty of news that could gyrate the markets as we look for more signs that it is time to taper bond purchases which include Retail Sales, Consumer Confidence, and Core PCE. And if that were not enough, we have Fed Chair Powell and Treasury Secretary testifying in front of Congress on the state of the economy. Lastly, the Treasury is selling billions in 2, 5, and 7-Year Treasuries. It will be interesting to see investor's buying appetite now we know the Fed is interested in not being a buyer very soon.

Treasuries at Risk as Fed Paves the Way for a Breakout in Yields

Traffic on the road to higher Treasury yields appears finally to be clearing up as central banks edge closer to ending emergency pandemic policies.

After getting stuck for months, 10-year Treasury yields broke through the top of a range that's held since mid-July, surpassing 1.40% and ending the week at 1.45%. That's up from the 2021 low of 1.13% set in August.

Read more... https://www.bloomberg.com/news/articles/2021-09-25/treasuries-at-risk-as-fed-paves-the-way-for-a-breakout-in-yields

Volatility Settles Down but Monday's Selling Still Sets the Pace

Published Date 7/21/2021

Stock indexes early this morning were mixed, the DJIA +141 at 8:30 am ET while NASADAQ -17. The 10 yr. note began up 2 bps to 1.23%, MBS prices -2 bps from yesterday. Starting the day with less volatility, no key data today; Treasury will auction $24B of 20 yr. bonds at 1:00 pm ET.

Traders turning to earnings season as would be normal but recent volatile movement put earnings on the back shelf for the last few sessions. Johnson & Johnson, Coca-Cola Co., Verizon Communications Inc., Kinder Morgan Inc., Baker Hughes Co. and Harley-Davidson Inc. among the many, many companies reporting.

Today is the day Congress was supposed to vote on the infrastructure bill, a $1T package that will fail as bipartisan negotiations drag on. Majority Leader Chuck Schumer has set a vote for today to begin consideration of infrastructure legislation, a step that Republicans have said they would oppose absent more details on its contents and how it would be paid for. Schumer is also pushing for all 50 members of the Democratic caucus to agree to a $3.5T outline for a broad antipoverty and climate package they are pursuing in parallel to the bipartisan infrastructure talks. Democrats on the Budget Committee and Mr. Schumer had announced a deal on the budget framework last week. The $3.5T bill tied to the infrastructure bill isn't likely to get enough votes.

Mortgage applications last week declined; the composite index -4.0%, purchase apps -6.4% while re-finances were down 2.8%. It's a week old news, with this week's drop in mortgage rates we look for a dramatic increase in re-finances and purchases a week from now. Not news that purchases are slow with increasing home prices and a lack of inventories countrywide. Purchase applications the lowest since May 2020. The average contract interest rate for traditional 30-year mortgages increased to 3.11% from 3.09% the prior week; already this week 30 yr. mortgages at about 2.85%.

The Treasury debt limit is presently $28.5B, it can't exceed that level. It isn't the first time and won't be the last that that government spending will exceed the statutory limit. I has to be increased or the government will shut down, and that is not likely. Worst case, a day or two shutdown before the debt limit is increased; there have been three instances of a short shutdown over the last 10 years. On July 31, the Treasury Department technically bumps up against its statutory debt limit. Today the Congressional Budget Office is scheduled to release its latest estimate of when the government actually would be unable to pay its bills -- known as the "X Date."

At 9:30 am ET the DJIA opened +175, NASDAQ +11, S&P +9. 10 yr. note at 9:30 am ET 1.27% +6 bps. FNMA 2.0 30 yr. coupon at 9:30 am ET -16 bps from yesterday's close and -44 bps lower than at 9:30 am ET yesterday; the 2.5 coupon at 9:30 am ET -24 bps from 9:30 am ET yesterday.

The interest rate markets now still correcting from the excessive selling on Monday. The 10 yr. note technical support now at its prior resistance at 1.30%, likely to be tested. If 1.30% holds look for a new trading range for the 10 between 1.30% and 1.20%.

Source: TBWS

3 Charts That Show This Isn’t a Housing Bubble

With home prices continuing to deliver double-digit increases, some are concerned we're in a housing bubble like the one in 2006. However, a closer look at the market data indicates this is nothing like 2006 for three major reasons.

1. The housing market isn't driven by risky mortgage loans.

Back in 2006, nearly everyone could qualify for a loan. The Mortgage Credit Availability Index (MCAI) from the Mortgage Bankers' Association is an indicator of the availability of mortgage money. The higher the index, the easier it is to obtain a mortgage. The MCAI more than doubled from 2004 (378) to 2006 (869). Today, the index stands at 130. As an example of the difference between today and 2006, let's look at the volume of mortgages that originated when a buyer had less than a 620 credit score.Dr. Frank Nothaft, Chief Economist for CoreLogic, reiterates this point:

"There are marked differences in today's run up in prices compared to 2005, which was a bubble fueled by risky loans and lenient underwriting. Today, loans with high-risk features are absent and mortgage underwriting is prudent."

2. Homeowners aren't using their homes as ATMs this time.

During the housing bubble, as prices skyrocketed, people were refinancing their homes and pulling out large sums of cash. As prices began to fall, that caused many to spiral into a negative equity situation (where their mortgage was higher than the value of the house).

Today, homeowners are letting their equity build. Tappable equity is the amount available for homeowners to access before hitting a maximum 80% combined loan-to-value ratio (thus still leaving them with at least 20% equity). In 2006, that number was $4.6 billion. Today, that number stands at over $8 billion.

Yet, the percentage of cash-out refinances (where the homeowner takes out at least 5% more than their original mortgage amount) is half of what it was in 2006.

3. This time, it's simply a matter of supply and demand.

FOMO (the Fear Of Missing Out) dominated the housing market leading up to the 2006 housing bubble and drove up buyer demand. Back then, housing supply more than kept up as many homeowners put their houses on the market, as evidenced by the over seven months' supply of existing housing inventory available for sale in 2006. Today, that number is barely two months.

Builders also overbuilt during the bubble but pulled back significantly over the next decade. Sam Khater, VP and Chief Economist, Economic & Housing Research at Freddie Mac, explains that pullback is the major factor in the lack of available inventory today:

"The main driver of the housing shortfall has been the long-term decline in the construction of single-family homes."

Here's a chart that quantifies Khater's remarks:Today, there are simply not enough homes to keep up with current demand.

Bottom Line

This market is nothing like the run-up to 2006. Bill McBride, the author of the prestigious Calculated Risk blog, predicted the last housing bubble and crash. This is what he has to say about today's housing market:

"It's not clear at all to me that things are going to slow down significantly in the near future. In 2005, I had a strong sense that the hot market would turn and that, when it turned, things would get very ugly. Today, I don't have that sense at all, because all of the fundamentals are there. Demand will be high for a while because Millennials need houses. Prices will keep rising for a while because inventory is so low."

Inflation Plus Rising Rates Will Test US Homebuilder Pricing Power

The combination of higher building material costs and rising mortgage rates will test the pricing power of US homebuilders, says Fitch Ratings. We expect demand to remain strong through 1H21, providing support for modest price increases on newly constructed homes, but trends could soften in 2H21, given increasing affordability issues and tougher yoy comps. Homeownership for entry-level and first-time homebuyers will increasingly become a challenge if higher costs are passed on to customers and the upward trend in mortgage rates continues.

https://www.fitchratings.com/research/corporate-finance/inflation-plus-rising-rates-will-test-us-homebuilder-pricing-power-26-03-2021