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Mortgage Market Update – November 26th, 2018

Mortgage Market Update – November 26th, 2018

Recent Events Recap

Hi guys. Hope everyone had a nice Thanksgiving and are ready for the final push into year end. Markets have been on an interesting ride for the last week or so, much of it likely do to lightly staffed trading desks and subpar liquidity around the holiday. Risk markets have been hammered, with the Dow and S&P down around 4% in just a few sessions. The move lower in equities has been led by the FAANGs – that is Facebook, Apple, Amazon, Netflix, and the company formerly known as Google (now known as Alphabet)—which only a short while ago were responsible for pulling major indices to new all-time highs. These are stocks that a huge number of main street Americans own in their retirement portfolio, either directly or through the ever-popular index funds. Given their respective market caps, these stocks comprise a large percentage of total stock market funds so while casual investors may believe they are diversified, they are quickly learning that they are not. However, it was not just the tech stocks that have struggled, but retailers and banks have not performed well either.

Treasuries and Mortgages

So, given the bludgeoning that equities experienced last week, your textbooks would tell you that Treasuries must have done very well as investors sought safe haven assets while moving out of risk. That is not what we saw. In fact, Treasury yields ended the week within a basis point or two from where they began. I believe the reason for this is largely technical in nature. There is a big technical barrier in the 3.04% to 3.06% zone for the 10yr, and after moving all the way down from 3.25% in weeks prior, it feels like momentum has sort of petered out. I suspect we will see a period of consolidation, or maybe even a bit of a retracement back to slightly higher yields before taking another run lower. I really believe we will see a 2-handle on the 10yr in the near future. In fact, Morgan Stanley’s research group is just out with their outlook for 2019, and they are calling for 10s to be around 2.75% by the end of next year.

Mortgages performed poorly last week as current coupon prices were actually lower (rates were higher) week over week, and this really was a function of poor liquidity. If we see some consolidation in Treasuries, investor interest in mortgages should pick up.

Forecasting

This week is going to be really important for defining market sentiment heading into year end. Not only will the minutes from the most recent FOMC meeting be released on Thursday, but Fed Chair Jay Powell has a scheduled speech for Wednesday at the Economic Club of New York. Economists and investors alike are beginning to call for a more dovish Fed and are eager to see if Powell shifts his tone. Odds of a 25-basis point rate hike are still pretty high for the December meeting, but they are creeping lower. The G20 is also gathering this week, and President Trump and Chinese President Xi are expected to meet on trade.

Equities are starting the week on positive footing and rates have moved very modestly higher. Stay nimble and good luck out there.

Hance Thurston
Head of Capital Markets, Southern Trust Mortgage


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