The Impact Of The Covid Economic Shutdown On The Yield And Dollar Swaps Curve (Mortgage Rates Down Over 100 Basis Points Since 03/13/20)

The various state economic shutdowns, particularly devastating to small businesses such as non-chain restaurants, has taken a serious toll on the US and global economies.

We can see the effects in the US Treasury Actives and US Dollar Swap curves. Compared with 03/02/2020, both the Treasury yield and US Dollar Swaps curve have steepened on the short-end.

Residential mortgage rates in the US have fallen over 100 basis points for the 30Y Fixed-rate mortgage. Mortgage rates are converging to near 3%.

And bond volatility has declined to an all-time low with The Fed’s rapid monetary expansion.

I guess Fed’s Jerome Powell is Mr Freeze!

Bond Volatility Flags U.S. Election as Event Risk of Decade (Fed Hammers Down Volatility With QE Infinity)

ICE BofA MOVE 1-, 3-month indexes spread highest since 2013
Trump election, positioning, postal voting elevate volatility

(Bloomberg) — Treasury options markets are pricing the Nov. 3 U.S. presidential election as one of the biggest isolated event risks in at least a decade.

The ICE BofA MOVE Index, which measures expected swings in Treasury yields across the curve, shows the spread between one- and three-month indexes rising to a level seen only once in the past decade. The latter captures the election between President Donald Trump and Democratic nominee, Joe Biden.

Investors’ nervousness about the potential for short-term turmoil can be seen in cross-asset volatility, particularly spreads for FX and Treasuries. Outside the U.S., the election is also starting to stress investors in the emerging world, and strategists and investors are urging caution as implied volatility rises.

The options markets on interest-rate swaps, commonly known as swaptions, also show traders are bracing for aggressive swings. A one-month option on the 10-year swap rates – which doesn’t start till a month’s time – has a terminal breakeven of 17 basis points. That implies a swing of down to 0.51% or up to 0.85%, from current level of 0.68%.

At least the MOVE index has been hammered-down by Fed monetary policy, including yesterday’s dot plot indicating QE Infinity!!!

Fed’s “dot plot” shows a strong consensus for interest rates to stay near zero through 2023

Perhaps the most uninteresting FOMC meeting ever. They did nothing, as expected.

And the new Fed dot plot reveals that The Fed is likely to keep their target rate at near zero through 2023.

Inflation expectations rose after Powell’s speech.

After today’s Atlanta Fed GDPNow real time tracker of 31.68%, it is surprising that the FOMC didn’t raise rates just a little.

Then again, the Rudebusch specification of the Taylor Rule model is calling for a Fed Funds Target Rate of -1.88%.

Of course, there is always the risk that state governors will keep the economy locked-down at least until the election. So we are stuck with 0.25% Snake Juice (aka, Powell Punch).

Update: Well, The Fed’s “good news” that rates will stay near zero for several years wore off quickly.

Homebuilder Optimism Hits Record, Fueled by Recovering V-Shape Economic Rebound (And Low Rates)

Want more evidence that the real estate market is experiencing a V-shaped recovery from the Covid epidemic? Look at the rebound in US homebuilder optimism!!

(Bloomberg) — U.S. homebuilder optimism rose to a record in September, with low mortgage rates driving a housing boom that has boosted the pandemic economy.

A gauge of builder sentiment jumped five points from a month earlier to 83, beating estimates and hitting the highest level in 35 years of the survey, according to the National Association of Home Builders/Wells Fargo Market Index. It was 78 last month, which matched the previous record from 1998.

While it is easy to link the V-shaped rebound to lower mortgage rates, mortgage rates were low prior and during the Covid crash.

The more powerful explanation is the anticipation of a V-shape economic recovery.

Economic rebound like a monster! Well, maybe not like Dennis Rodman.

The Cost Of Covid: The Case of Commercial Real Estate, Government Shutdowns and Loan Delinquency

Trepp – Commercial real estate (CRE) loans in bank portfolios are showing stress related to the economic downturn and signs that some borrowers are already expecting to default on their mortgages.

The current delinquency rate stands at the highest level since the recovery period after the last recession but still well below the 9% delinquency rate for CRE loans at the peak of the financial crisis.

However, there are signals in the data that some borrowers may be strategically defaulting on their loans which could feed a wave of foreclosures in the coming four to six quarters.

Las Vegas NV leads the US in 30 day delinquent office property loans.

Columbus Ohio, home of The Limited Stores brand, leads the nation in 30 days delinquent retail property loans.

Here is a shocking graphic. New York – Newark hotels have seen -62% decline YoY in appraised values whereas Los Angeles saw a -74% decline in appraised values of office space.

Total sales of commercial real estate has declined to the lowest since mid-2010 and The Great Recession.

George Mason University School of Business professor sitting at a small desk in a large empty raw office space.