Morning Report: Bond trading is now like trading commodities

Vital Statistics:

	Last	Change
S&P Futures	2177.0	58.0
Eurostoxx Index	345.0	4.0
Oil (WTI)	41.6	-0.2
US dollar index	86.0	-0.2
10 Year Govt Bond Yield	1.51%
Current Coupon Fannie Mae TBA	103.8
Current Coupon Ginnie Mae TBA	105.2
30 Year Fixed Rate Mortgage	3.52

Markets are flattish this morning on no real news. Bonds and MBS are flat as well.

Slow news day (again)

Initial Jobless claims dipped ever so slightly to 266k last week. 

Import prices rose 0.1% month-over-month, but are down 3.7% on an annual basis. Inflation remains in a deep freeze. 

Housing has historically been the vehicle people use to build wealth. For most people, it is their biggest assets. Home prices have been rising since bottoming in 2012, but aspiring homeowners have been shut out as the homeownership rate hits levels not seen since the 1970s. For young Millennials with student loan debt and difficult job prospects, home price increases have made the dream of homeownership further out of reach. Meanwhile, rental inflation (driven by the same scarcity issues that are driving home price appreciation) mean that rent accounts for a bigger and bigger percentage of disposable income. 

The homeownership rate fell to 62.9% in the second quarter, which is a 51 year low. You can see the big jump in homeownership that started in the mid 90s has been reversed. That jump in homeownership was a function of Bill Clinton's social engineering via the housing market and the development of a securitization market. Tight credit post-financial crisis remains an issue as well, as the US taxpayer bears the credit risk for 90% of all origination. If a loan doesn't fit into the government / conforming box, it likely isn't getting done. 

That said, this does represent pent-up demand that will be unleashed at some point, and with housing starts still well below historical averages, could provide a massive boost to the economy once it turns around. Don't forget the Millennial generation is bigger than the baby boomers. Amidst the gloom however, is evidence that the Millennials are finally buying. 

Interesting observation, and spot-on: Negative interest rates have made bond investing similar to commodity investing. As Warren Buffett would say that with commodities you are simply betting on what someone else might pay for them at some future moment. Commodities cost money to hold (because storage isn't free) and now bonds with negative yields exhibit the same characteristics. The only way to make money in bonds has been to find a greater fool to sell to. If this causes volatility to spike (which in theory it should), then that will have major effects on mortgage rates and pipeline hedging.

Morning Report: Uncle Sam is the creditor for 28% of the consumer loan market

Vital Statistics:

	Last	Change	Percent
S&P Futures	2081.4	-5.9	-0.28%
Eurostoxx Index	2868.3	-42.8	-1.47%
Oil (WTI)	48.5	-0.6	-1.16%
LIBOR	0.656	0.000	-0.07%
US Dollar Index (DXY)	94.55	-0.021	-0.02%
10 Year Govt Bond Yield	1.63%	-0.02%
Current Coupon Ginnie Mae TBA	105.7
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.7

Stocks are lower this morning on fears over Brexit (The 6/23 vote to decide whether the UK leaves the EU). Bonds and MBS are up small.

No economic data today. The big event this week will be the FOMC meeting Tuesday and Wednesday. The markets are expecting no changes to interest rates, so any bond rally on the news of no changes will probably be limited. 

Interesting chart about the Federal government's percent of ownership of consumer debt. This is money that US citizens owe Uncle Sam. Ever since Obama nationalized the student loan sector, they have taken their percentage of consumer debt from 5% to 28%. The student loan market is a $1.3 trillion market - not exactly chump change. Expect some sort of write-down of student loan debt in the future: many graduates have degrees that will never pay enough to work this down. As a side note, more young adults aged 18-34 live at home with Mom and Dad than in any other arrangement. 

Speaking of Millennials, the high student loan debt is causing lower credit scores. The average credit score for the 18-34 age cohort is 625, compared to the national average of 667. Almost a third of that age cohort have sub-600 scores. Good luck getting a loan with that. Finally, all of the new post-2008 regulations have added anywhere form 50k-100k to the cost of building a starter home, making it difficult for builders to make homes that are affordable for the first-time homebuyer. 

There is now $10 trillion worth of global sovereign debt trading at negative yields. Bill Gross of Janus Capital calls that a "supernova" that will explode one day. All of the worlds' central banks are on a mission to create inflation: one day they will succeed. What has been the best trade for bond investors lately? The Japanese 30 year bond, which now yields 28 basis points. Bill says that bond yields today are the lowest in 500 years. Not sure where he comes up with that number.

Speaking of Central Bank jiggery-pokery, ECB corporate bond buying now makes up for 1 in 5 trades. We are truly in uncharted waters with global central banking. 

As a general rule, buy stocks in an election year. Election years tend to be optimistic times, and the Fed is usually on your side. That might not be the case this year. 

Morning Report - Rents are driving Millennials to buying.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2085.8	0.9	0.04%
Eurostoxx Index	3700.0	-31.4	-0.84%
Oil (WTI)	47.8	0.3	0.61%
LIBOR	0.267	0.000	0.00%
US Dollar Index (DXY)	96.67	-0.523	-0.54%
10 Year Govt Bond Yield	1.86%	-0.01%
Current Coupon Ginnie Mae TBA	103.1	0.0
Current Coupon Fannie Mae TBA	102.5	0.0
BankRate 30 Year Fixed Rate Mortgage	3.82

Markets are flat this morning on no major news. Bonds and MBS are flat as well.

Mortgage Applications rose 9.5% last week as purchases rose 4.9% and refis rose 12.3%. Refis were 60.5% of all applications last week. 

Durable Goods orders fell 1.4% in February. Cap Goods Orders Non-Defense / Ex-air (a proxy for business capital investment) fell 1.4%, while January was revised downward from .6% to -.1%. Corporate America is not increasing capacity at all, and is not pursuing expansion opportunities.

What do companies with cash burning a hole in their pockets do when there are no great expansion opportunities out there? Buy each other. In a bit of a complicated deal, Heinz is buying Kraft. As oil stays down here, I expect to see some deals in the energy patch. The last time oil was this low (aside from the financial crisis days) we saw some huge deals:  Exxon buying Mobil, Conoco buying Philips, and BP buying Amoco. 

Rents are rising so fast that they are forcing Millennials to buy houses. In fact, Millennials are now a bigger homebuying cohort than Generation X. Student loan debt remains the biggest hurdle, however. As the economy recovers, a lot of pent-up demand is going to be unleashed. We have gone from a glut of housing to an extreme shortage, which means the builders are going to have to bump up production. The economy is already reasonably strong with only 1.1 million housing starts. If we get back to normalcy (1.5 million), that will provide a big boost. Plus construction employs a lot of people.