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Cure for Higher Rates and Spring is in the Air

April 18, 2024
Higher rates could be a reason for the strong 20-year Auction yesterday and rebound we saw in Mortgage Bonds. Imagine you or a bank has a Bond portfolio, where you are searching for yield. There are short term yields, that may not last that long based on what the Fed does, and longer term yields that you can lock in for a longer period of time.

Stocks are higher and Mortgage Bonds are lower, giving back some of their gains from yesterday.

Cure for Higher Rates is Higher Rates

Higher rates could be a reason for the strong 20-year Auction yesterday and rebound we saw in Mortgage Bonds.

Imagine you or a bank has a Bond portfolio, where you are searching for yield. There are short term yields, that may not last that long based on what the Fed does, and longer term yields that you can lock in for a longer period of time. 

At the end of last year and beginning of this year, we saw yields start to come down – This happened because you could have put your money in a money market account around 5.25%, but the Fed indicated that they were going to cut rates. When they do, the money market and short-term yields come down right away. So instead of getting 5.25% for a short period of time, many decided they will take a slightly lower rate of return and invest in things like the 10-year Treasury, locking in that rate for a much longer period of time. This is part of the reason why yields dipped beneath 4% earlier in the year.

Since the Fed has indicated that they are not confident that inflation is coming down to target and rate cuts have been pushed to later in the year, more investors have invested in money market accounts as their rate will likely now be protected for longer with the Fed waiting several more months to cut. But as a result of the inflation data and Fed’s commentary, long term yields have risen. We may now be starting to see investors decide that 4.62% on the 10-year is a pretty good return and not far off what they could get in a money market account, but that return is protected for a much longer period of time. And the Fed has not indicated that they are going to hike, they still believe they will cut, just later. If we see this trend play out and more demand come into investments like the 10-year since yields are now higher, it could help push yields lower. Hence the cure for higher rates being higher rates.

Existing Home Sales

Existing Home Sales, which measures closings on existing homes, fell 4.3% in March to an annualized pace of 4.19M units, which was slightly better than market estimates. Sales are now down 3.7% year over year. 

Inventory increased 4.7% month-over-month to 1.11M units, which is a good thing because there is very limited supply, and this could lead to more sales. There is a 3.2-month supply of homes, which is tight but up from 2.9 months, because 4.6 months is considered normal.

The median home price was $393,500, up 1.4% from last month and 4.8% from last year. Homes remained on the market for 33 days on average, down from 38 days in February. 

First-time homebuyers accounted for 32% of sales, which is up sharply from 26% in the previous report. Cash buyers accounted for 28% of sales, down from 32%. Investors made up 15%, down from 21% in last month’s report. 

29% of homes sold above the list price, a big jump from 20% in February.  That’s almost one in three homes - Make sure to use the bid over ask tool.

Overall, although there was a decline in the pace of sales, some of the internals are showing strength and signaling that the spring home buyer season is here. Homes remained on the market for a shorter period of time and a greater number of homes sold above the list price, signaling competition.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, remained at a very low level of 212,000.

Continuing Claims, or those that continue to receive benefits after their initial claim, rose 2,000 to 1.812M and still remains around some of the hottest levels we have seen since November 2021.

The BLS has a ton of components that they utilize in coming up with their jobs figures, one of which is the “sample week” of initial jobless claims. The sample week is the week encompassing the twelfth of the month, which is today’s report since it’s measuring claims last week. From this one component, it would point to strong job growth since it was so low at 212,000. 

Technical Analysis

Mortgage Bonds had a nice rally yesterday, but were unable to break back above the 99.647 Fibonacci level. Yields are giving back some of those gains today and are in a very wide range, where big price swings are possible.

The 10-year has retreated from the yearly high of 4.694% and is now at 4.62%. Yields are also in a very wide range and giving back some of their move lower from yesterday, but there is more room to the downside than risk to the upside. 

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