Morning Report: Bond yields rise on a weak 10 year auction

Vital Statistics:

	Last	Change
S&P Futures	2149.0	4.0
Eurostoxx Index	337.6	1.4
Oil (WTI)	46.4	-0.4
US dollar index	87.0	0.1
10 Year Govt Bond Yield	1.47%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
BankRate 30 Year Fixed Rate Mortgage	3.48

Markets are higher this morning on no real news. Bonds and MBS are up.

Bond yields rose dramatically yesterday on hopes of future stimulus. The 10 year was trading around 1.52% yesterday after lower than expected demand at a Treasury auction. Yesterday, Germany auctioned 10 year bunds at a yield of -.05%. Yields worldwide are heading lower this morning. Note that MBS are still largely ignoring the volatility, although we did see some reprices yesterday. 

Mortgage Applications rose 7.2% last week according to the MBA. Purchases were flat, while the refi index rose 11%. Note this was a short holiday week and we still saw a big increase in refis. 

Import prices rose 0.2% MOM and are down 4.8% YOY. The strength in the US dollar (or as Bill Gross says, the cleanest dirty shirt) is driving the drop. Yet another reason why the Fed can't seem to find inflation anywhere. 

Bernie Sanders made it official yesterday and endorsed Hillary Clinton. Meanwhile, Mitt Romney and Jeb Bush are considering backing Libertarian Gary Johnson. The GOP convention is this weekend, and promises to be a spectacle between the #NeverTrump crowd and the expected protests from the left. Here is how the #NeverTrump crowd can block his nomination. 

The Atlanta Fed is now estimating that US GDP growth increased at a 2.3% pace in the second quarter. This is a drop of 0.1% from their estimate a week ago. 

James Bullard believes that Brexit will have almost no US impact. Loretta Mester said more or less the same thing as well. The main effect will probably be a stronger dollar and lower interest rates in the US. 

One of the biggest effects of the financial crisis may be rolling off: Those who had short sales and foreclosures in 2009 - 2010 are reaching the end of the 7 year no mortgage period and become eligible to borrow again. 

Morning Report: Since the Fed hike, bond yields have dropped 42 basis points.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1912.5	-18.8	-0.97%
Eurostoxx Index	2972.3	-48.7	-1.61%
Oil (WTI)	30.16	-1.5	-4.62%
LIBOR	0.613	-0.003	-0.49%
US Dollar Index (DXY)	98.89	-0.119	-0.12%
10 Year Govt Bond Yield	1.90%	-0.05%
Current Coupon Ginnie Mae TBA	105.1
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.76

Stocks are getting roughed up a little as overseas markets and oil continue to fall. Bonds and MBS are up sharply, with the 10 year trading just below 1.9%.

The ISM New York Index fell from 62 to 54.6 while the IBD / TIPP Economic Optimism Index ticked up slightly to 47.8. 

The winners in Iowa last night were Ted Cruz and Hillary Clinton. Unofficially, the winners were Rubio and Bernie. The losers? Donald Trump and the pollsters who had him in the high 40s. He came nowhere near that. Note that there are allegations of tomfoolery on the Democratic side with vote counting..

The correlation between global stock markets and the price of oil is somewhat strange - historically, high oil prices were considered bad for stocks, not good. While the drop in oil prices is certainly not good news for the big integrated energy companies, it is great news for consumers. Overall, the US benefits from low oil prices. The action in the stock market may be viewing the oil price as the canary in the coal mine for the global economy. 

For the time being, the drop in commodities and stocks is keeping a lid on interest rates, which is a good thing for originators. The 10 year is heading back to late winter / early spring of 2015 lows. Fun fact, since the Fed raised the Fed Funds rate on December 16th, the 10 year bond yield has dropped 42 basis points. The trader in me says bond yields have fallen too far too fast.  Loan officers, if you have someone floating, try and lock 'em.  And wake up any potential borrowers who missed out on refinancing the last time around. 

Delinquency rates continue to fall, according to Fannie Mae. In December, the seriously delinquent rate fell to 1.55% from 1.58% in November and 1.89% a year ago. Home price appreciation and an improving job market are doing their jobs. 

With house price appreciation increasing well in excess of wage inflation, how affordable is housing these days? It depends on the statistic you use. If you look at the median house price versus the median income, you would conclude that housing affordability is approaching the lows of the bubble. However, if you look at the mortgage payment on the median house divided by median income, housing is at pre-bubble levels affordability-wise. Another argument to find people with ARMs and refi them in to 30 year fixed rate mortgages. 

Morning Report: Pending Home Sales flat

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.6	3.7	0.18%
Eurostoxx Index	3511.1	22.1	0.63%
Oil (WTI)	42.13	0.4	1.01%
LIBOR	0.414	0.003	0.61%
US Dollar Index (DXY)	100.2	0.140	0.14%
10 Year Govt Bond Yield	2.22%	0.00%
Current Coupon Ginnie Mae TBA	104.1
Current Coupon Fannie Mae TBA	103.5
BankRate 30 Year Fixed Rate Mortgage	3.92

Stocks are higher as market participants return from the Thanksgiving holiday. Bonds and MBS are flat.

The highlight of this week will be the jobs report on Friday. This will be the last jobs report before the December FOMC meeting. The Fed Funds futures are pricing in a 75% chance of a tightening. 

The European Central Bank meets this week, which should add even more noise to interest rates later this week. 

Pending Home Sales rose 0.2% in October and are up 2.1% year-over-year. Tight inventory and rising prices are crimping sales. Pending Home Sales rose the most in the Northeast, where we haven't been seeing the torrid price appreciation we have been seeing on the West Coast. 

The ISM Milwaukee manufacturing index fell to 45.3 from 46.7 last month. The Chicago Purchasing Manager index fell from 56.2 to 48.7. Again, we are seeing the stronger dollar affect manufacturing. Inventory build is a problem, and was the driver of the upward revision in Q3 GDP. We could be setting ourselves up for a letdown in Q4.

Technical issues could keep a lid on long-term yields, which should be good for mortgage rates. Due to a shrinking budget deficit, funding needs for the government are falling, and regulatory requirements have increased demand for shorter-term Treasury bills instead of longer-term bonds. Treasury bond issuance is expected to fall 33% next year to $400 billion. Some analysts are forecasting a 50% drop. This means we could be looking at a scenario where short term rates increase and longer term rates go nowhere. 

As home prices rise, affordability is declining. The median house price to median income ratio is around 4.6x, which is closing in on its bubble high of almost 5x, and well above its historical range of 3.2x - 3.6x. What is driving the increase in house prices? Restricted supply has been an issue, as housing starts have been anemic since the bust. Another issue has been foreign demand, especially from China. There are a couple of things going on here. First, Chinese demand is partially driven by a desire to have dollar denominated assets, and second US policy regarding immigration. If a Chinese investor funds a development which creates US jobs, they get a green card. Chinese money which levitated prices on the West Coast is now moving inland, funding McMansion communities outside suburbs of Dallas and Chicago. Since Chinese buyers are cash-rich, they don't need a mortgage and are winning bidding wars by offering cash.