Morning Report: Markets sell off as 10 year breaches 3% level

Vital Statistics:

			Last	Change
S&P futures			2626.5	-9
Eurostoxx index			379.58	-3.53
Oil (WTI)			67.53	-0.22
10 Year Government Bond Yield				3.02%
30 Year fixed rate mortgage				4.59%

Stocks are lower this morning after yesterday's interest rate-driven sell-off. Bonds and MBS are down.

The 10 year breached the 3% mark yesterday, which served as a catalyst for a substantial stock market sell-off. Of course 3% is just a round number, but it is the highest rate since 2014. Some pros are looking for a global slowdown in the economy, which could make some corporate borrowers vulnerable. We certainly appear to be in the late stages of a credit cycle. Junk-rated bond issuance has been on a tear over the past few years, reaching $3 trillion as yield-starved investors have had to reach into the lower credits to make their return bogeys. That said, corporate bond spreads are still at historical lows, (investment grade spreads are still half of what they were as recently as early 2016. Let's also not forget that much of the bond issuance over the past 8 years went to refinance old debt at higher interest rates - in other words it was a net positive for these companies. 

We are now going to see just how much of the huge rally in financial assets over the last decade was due to the inordinate amount of stimulus coming out of the Fed. As stocks now have to compete with Treasuries, some changes in asset allocations are to be expected and the riskier assets are going to bear the brunt of the selling. Keep things in perspective, however. Interest rate cycles are measured in generations. 

One of the benefits of QE has been to goose asset prices (which was kind of the whole point). Increasing people's net worth would increase spending and therefore increase GDP. It probably worked, however that hasn't been costless. One of the problems with increasing real estate prices is that it shuts people out from places where there is opportunity (California in particular). If you already own property in CA and have been experiencing torrid home price appreciation, you can move since your increased home equity can be used to purchase another expensive property. But if you live in the Midwest were home price appreciation has been less, you might not be able to take that job in San Francisco since you can't afford to live there. That said, negative equity was probably a bigger problem and home price appreciation did mitigate that issue. 

Mortgage Applications fell 0.2% last week as purchases were flat and refis were down 0.3%. Conforming rates increased 6 basis points, while government rates increased 1. ARMs decreased to 6% of total applications. A flattening yield curve makes ARMs less and less attractive relative to 30 year fixed mortgages.  

Acting CFPB Director Mick Mulvaney has made some changes at the Bureau. First, he is ending the pursuit of auto lenders, which Dodd-Frank prohibited. The Cordray CFPB did an end-around by going after the big banks behind some of the auto financing, and that will end. Second, Mulvaney will no longer make public the complaint database against financial services companies, saying that “I don’t see anything in here that I have to run a Yelp for financial services sponsored by the federal government.” Finally, he plans to change the name from the CFPB to the BCFP. All of this is in keeping with Mulvaney's commitment to follow the law and go no further.