Despite Mortgage Rate Declines, Mortgage Purchase Applications Fall With Smokin’ Home Price Growth (What Will The Fed Do?)

While the Fed’s Jackson Hole meeting is going on, the Mortgage Bankers Association released their weekly applications data. Mortgage purchase applications fell -1.6% from the previous week. But look at the following chart.

With smokin’ home price growth, we are seeing a decline in mortgage purchase applications.

But at least mortgage refinancing applications are up 9.27% from the previous week as the MBA contract rate fell from 3.11% to 3.01%.

Is The Fed paying attention? Or riding jackalopes in Jackson Hole?

Alarm! U.S. Real Yields And Real Mortgage Rates Fall to Record Low Amid Growth Concerns (Real 10Y Treasury Yield Falls To -3.92% While Real 30Y Mortgage Rate Falls To -2.61%)


The real yield on U.S. 10-year debt fell to a record low as concerns mounted over the outlook for economic growth.

The rate, which strips out inflation, fell almost six basis points to minus -1.269%. The move was compounded by a lack of trading liquidity, with the 10-year breakeven rate — a market proxy for the average annual rate of consumer prices over the next decade — edging higher at 2.36%.

Still, it points to souring investor sentiment amid the rapid spread of the delta variant that threatens to derail the economic recovery. And it comes as investors piled into haven assets after a surprise hit to Germany’s business confidence.

That is much better than my chart that shows the REAL 10-year yield t -3.92% and the REAL Freddie Mac 30-year mortgage rate at -2.61. Based on headline CPI YoY.

Or at least record lows since 1975.

Economists are flocking to Jackson Hole, Wyoming for the KC Fed’s Economic Policy Symposium for the next three days. It is rumored that Fed Chair Jerome Powell (left), Fed Vice-chair Richard Clarida (center) and former Fed Chair Janet Yellen (right) will be in attendance.

US House Price Growth Slowing … A Bit … As Fed Slows M2 Money Growth (Slow Stimulus Withdrawal)

John Burns consulting has this interesting chart showing a slight slowdown in home price growth. But HPI growth is still growing strong. At 17% YoY in June.

The Case-Shiller National home price index, growing at 14.6% Yo is lagged with reporting only as of April. But you can see the slowing M2 Money Stock YoY. Although M2 Money stock is still growing at a sizzling 13.84% YoY as of May.

So if John Burns is correct, then we should see an increase in the next Case-Shiller report for May, then a slight slowdown in Case-Shiller’s June report.

But if we look at new home prices (net of incentives), we see a 20% YoY price increase (Source: John Burns)

And the housing pump is primed with the lowest REAL 30-year mortgage rate since 1975.

Here is Fed Chair Jerome Powell talking about The Fed’s monetary policies and housing bubbles.

US 30-year REAL Mortgage Rate Plunges To -2.35%, The Lowest Since 1975, House Price Growth Highest In History

Talk about NIRP (negative interest rate policy). The Real 30-year mortgage rate (nominal rate – headline CPI YoY) has now fallen to -2.35%.

While the REAL 30-year mortgage rate is at its lowest level since 1975 and President Gerald Ford, home price growth is at its highest in history and higher than the peak of the housing bubble.

And then we have this chart of US House Price-to-Rent ratio. Highest ever! Even exceeding 1975!

Lowest real mortgage rates since Gerald Ford.

US Existing Home Sales Rise 1.4% MoM In March, But Median Prices Soar 23.4% YoY With Small Increases In Inventory (Where Have All The Affordable Houses Gone?)

I was reading the usual pundits talking about massive increases in housing coming onto the market, then I saw today’s existing home sales numbers from the National Association of Realtors.

US existing home sales were up 1.38% in June from May, but up 22.85% YoY.

But the scary numbers were median price of existing home sales YoY printing at +23.4% while EHS inventory increased to the highest level … in 2021 but 2021 is sill lower than anytime since 2000. Maybe July’s numbers will show that incredible spike.

Existing home sales were largely in the South, then Midwest, then West and finally the Northeast.

But look at distribution of EHS prices. Houses in the $100K-$250K range (green line) are rapidly vanishing while houses in the $500K-$750K (pink line) are rapidly increasing.

Where have all the affordable house gone?

The good news? Freddie Mac’s 30 year commitment rate fell again.

The housing and mortgage markets are being washed in The Fed’s dirty water.

Wells Fargo’s 41.44% Earnings Surprise In Q2 Despite Lower Lending And Higher Deposits (The New [Ab]Normal?)

Is this the new normal for banking? A big 4 bank actually had a huge upside earning … on declining lending??

Yes, Wells Fargo had a 41.44% earnings surprise on July 14, 2021.

Wells Fargo Earnings Per Share (EPS) plunged during the March 2020 Covid outbreak, but has been recovering … in terms of EPS and share price.

Wells Fargo is seeing booming deposits (green) at virtually zero deposit rates while loans have fallen (green). The recent widening between deposit and loans is in the pink box while the general widening has taken place since Q4 2010.

Total loans to total assets (white) has been falling since The Financial Crisis and housing bubble burst.

Wells Fargo’s total risk based capital ratio dramatically increased after the financial crisis, as it did for all banks.

O-ho the Wells Fargo Wagon is a-comin’ down the street, but to collect deposits and make fewer loans.

Ya got trouble right here in DC city.

Divergence! Latest Bank Data Reveals Something Is Terminally Broken In The US Financial System

All I can say is “Yikes!!” Something is broken in the US financial system.

As I have discussed before, bank deposits are soaring while loan demand is … not.

The recent banking data shows a slowdown YoY in bank deposits, but also shows negative loan and lease growth at banks.

Residential mortgage growth is negative YoY. At least commercial mortgage lending is still growing, albeit at a lower rate.

Speaking of something being broken …

Powell and Yellen are probably screaming “Give our creation life!!!!!”

Yikes! Something happening.

Slowdown! Bank Lending Slows Since Fed 2020 Intervention And The Rise Of Reverse Repos (Inflation And Bubble Fears)

There is a slowdown in bank lending since The Fed’s intervention in March 2020.

Bank credit has slowed since March 2021 resulting in banks parking money with The Federal Reserve in the form of reverse repos.

Loans and leases are experiencing negative growth rates.

Residential real estate loans are also experiencing negative growth rates and a corresponding rise in reverse repo usage.

Commercial real estate lending remains in positive territory.

Commercial and industrial loans? Also experiencing negative growth rates.

Clearly, banks are nervous about inflation since lending at fixed-rates in an inflationary environment is bad news.

Not to mention fears of asset bubbles that can burst. House prices growing at 14.6% YoY and the S&P 500 stock market index growing at 34.2% YoY.

Treasury Secretary Janet Yellen says she is concerned about rapidly rising housing prices, but says inflation will calm.

Perhaps Yellen will click her heels together three times to make inflation calm.

Milton says hello!

UMich Sentiment Declines In July As Inflation Expectations Hits 4.8% (Highest Since 2008), Buying Conditions For Housing Plunges

The University of Michigan consumer survey was released this morning and revealed that their consumer sentiment index fell to 80.8 (the index was around 100 prior to the Covid outbreak in March 2020).

Inflation expectations for the coming 12 months soared to 4.8%.

UMi buying conditions for housing has collapsed (but the measure is lagged one month). House price inflation is running at 14.59% YoY making housing less affordable. Hence, lower consumer sentiment for housing.

Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell are slated to discuss the hot U.S. housing market and the risks it could pose to the financial system at a meeting with fellow regulators on Friday.

The aim of the closed-door session: To make sure the U.S. is not vulnerable to a crisis akin to the one it suffered more than a dozen years ago, when the bursting of a property-price bubble drove top banks to the brink of insolvency and the economy into a deep recession.

The meeting of the Financial Stability Oversight Council, or FSOC, that’s headed by Yellen will come on the heels of two days of testimony by Powell to Congress on the Fed’s semi-annual monetary policy report.

Better late than never?

Milton says hi!

Wall Street’s Math Whizzes Are Racing to Wire Up the Bond Market (Fed Created Debt Glut With Their ZIRP Policies)

When I worked at Deutsche Bank in New York City, we had an electronic bond trading system called “Autobahn.” A high speed electronic bond trading platform analogous to the German Autobahn highway system.

(Bloomberg) — For years, David Horowitz at Agilon Capital was a rare breed in the bond market: a quant in a notoriously old-school business where prices were a call rather than a click away.

Sixteen months of the pandemic is changing all that.

The work-from-home era is fueling a surge in electronic bond trading that gives the likes of Horowitz conviction a long-augured quant revolution is finally ready to sweep the debt world.

Long credit positions held by quants have doubled since 2018 according to Man Group data, outpacing the 20% growth for other asset managers as systematic players seize on the rapid market modernization — like they did in stocks years ago.

“Credit is going through a similar evolution,” said Horowitz, who led the pioneering systematic credit team at BlackRock Inc. before starting his own$290 million fund. “As we become more electronified we should expect the same sorts of forces to come into play.”

Quants have been saying that for years of course, only to have their math-based models frustrated by the cumbersome and complex debt world. The difference now is that they may have a market liquid and transparent enough to accommodate their constant churn.

Electronic venues like MarketAxess and TradeWeb accounted for 37% of investment-grade and 26% of high-yield trading in May, 8 percentage points higher than the year before, Coalition Greenwich data show.

That sets up a virtuous circle, where banks roll out more algorithms to price more bonds. Throw in a year of record flows into credit exchange-traded funds, and a broad swath of securities is becoming easier to trade vital for a cohort which typically holds hundreds of positions and trades more often than an average fund.

It’s helped answer the question of ‘will we be able to trade this tomorrow?’” said Paul Kamenski, co-head of credit at the quant firm Man Numeric.

Liquidity in the bond market has long been fragmented by its very nature — companies generally issue multiple bonds. That means quants might see their models spit out a dream portfolio but have to adjust it based on what can actually be traded, Kamenski said.

“We had to try to do things that were less natural in quant strategies,” such as trading in larger sizes or catering to dealer inventories, he said. “It’s still hard today, but it’s become more manageable.”

That doesn’t necessarily mean the whole market is suddenly highly liquid — gripes about how hard it is to offload large blocks are everywhere.

But it’s become easier to move smaller sizes and figure out where each bond is trading, which helps detect signals and cut transaction costs, Horowitz said.

Over at banks’ trading desks, Asita Anche at Barclays Plc has seen a jump in algo usage, especially to execute small trades. But she stresses that humans are still essential in fixed income since liquidity is more fragmented than in equities and it’s harder to manage risk.

“The future is not algos taking flows away from humans,” said the head of systematic market making and data science. “It’s humans enhanced by algos and automation.”

With that in mind, Anche is building algos and data analytics for voice traders, and even a recommendation engine akin to Netflix’s that finds similar securities to what a client wants to trade.

Bond quants remain a tiny minority — those long positions total around $23 billion, Man Group says, versus $537 billion for other managers. And the systematic bunch operates a range of strategies, from equity-style factors like value or momentum to arbitrage or trades based on moves in an issuer’s stock.

That all makes performance hard to judge and data is scarce. A Premialab index of systematic credit strategies built by investment banks lost 5% over the past three years of rising markets and gained nearly 3% in 2021. Among global bond mutual funds, quants trailed other investors on a three-year horizon, eVestment data show.

Nonetheless, the rise of electronic trading in equities minted billions for quants and reordered the market. Many bond players are predicting a similar trajectory for their asset class, with the bonus pitch that the kind of crowding that has undermined stock strategies is a long way off.

I’ve been doing this for 20-odd years and for most of that, doing this type of systematic credit — people wouldn’t even know what I’m talking about,” said Horowitz at Agilon. “Credit is still very much in its early innings.”

With massive Federal spending, Federal debt issuance is going to continue to explode. As will agency MBS.

Ever since 2008 and the dramatically increased presence of The Federal Reserve in markets, and particularly since the March 2020 Covid outbreak, we have seen record increases YoY in corporate debt, US public debt (aka, Treasury debt) and agency mortgage-backed securities.

Corporate debt issuance was negligible since the housing bubble years of 2002-2007, but has been relatively constant since Q4 2007 and surged to over 10% in Q2 2020.

With continued zero interest rate policies from The Fed, debt issuance will continue at break-neck speeds. It is only logical that bond quant strategies and electronic credit trading grow.

Speaking of corporate bonds, here is a graph of US corporate bond yields against modified duration.

And here is US corporate bond yield against duration sorted by bond coupon.