So much for MMT (modern monetary theory) where deficits and debt don’t matter. Size and quality of debt DOES matter. Just look at the interest rate risk of staggering debt loads, not to mention the credit risk!
(Bloomberg) — Investors riding easy-money policies are breeding a trillion-dollar monster in the bond market, the likes of which has never been seen in decades of history.
Wall Street will tell you it’s low risk for now — one that’s been hyped-up for years. But on the current trajectory, just a modest bump in yields near record lows could inflict a world of pain for traders all over the globe.
Dovish monetary bets, relentless demand for safe assets and conviction in the lowflation era are spurring money managers to gorge on long-maturity bonds, or duration risk.
One measure of the relative compensation investors receive to hold longer-dated obligations is a whisker away from a 58-year low. Over in Europe, they’re taking a century of risk for yields barely above 1% in order to escape a $13 trillion global stockpile of negative debt.
All that is leaving duration, a measure of sensitivity to interest-rate changes, near all-time highs across sovereign debt markets. As hopes rise of a U.S.-China breakthrough on trade, bond bulls could suddenly find themselves on the backfoot.
And the interest rate volatility cube seems to be giving the middle finger to investors.
Debt now emerges as the new Godzilla in the room.
US New Home Sales dropped 7.8% MoM in April to 626k units SAAR.
Notice that new home sales YoY are down 3.7% while median prices for new home sales are down 2.7% YoY. New home sales YoY peaked in 2012 and have been slowing cooling.
And new home sales are declining despite declining mortgage rates.
Today, the Federal Reserve’s Open Market Committee (FOMC) met and revealed … no change to rates. BUT are willing to cut more than 25 basis points at the upcoming meeting on July 31 (more flexibility).
The FOMC’s Dots Plot (where members think rates will be in the future) is expected to rise after 2020. (Thanks to Rudy Havenstein!)
The economy is generating only 1.5% core inflation, below The Fed’s target rate of 2%.
On the announcement of no rate cuts and a possible rate cut of 50 basis points in July, both the 10-year and 2-year Treasury yields declined.
10-year Treasury Note.
2-year Treasury Note.
Fed Funds volatility surface? Looks like a Tsunami!
Where is the inflation??
Don’t panic. It is June. Mortgage purchase applications typically peak in May and it is generally downhill from there until the beginning of January.
Mortgage purchase applications dropped 5% for the week ending June 14. Mortgage refi applications dropped 3.5%.
Mortgage purchases applications have been trending down since 2007 until 2015 when they began rising again. Note that mortgage originations with FICO scores below 620 also plunged after 2007.
Mortgage purchase applications rose after the first of the year with declining mortgage rates, but that happens every year (even when rates rise!). But mortgage purchase application are remaining strong relative to previous years, likely due to declining mortgage rates.
Mortgage refi applications declined 3.5% WoW as mortgage rates were steady. But we are not seeing the surge in refi applications with a large decline in mortgage rates since the pool of eligible refi applications has shrunk.
So, don’t panic! The Fed is likely going to cut their target rate again in July.
The housing starts report for May was dismal. 1-unit housing starts fell 6.4% from the previous week despite mortgage rates breaking through the 4% barrier to 3.99%.
At least 1-unit starts got one surge from declining mortgage rates in January 2019.
Will The Fed’s Jay Powell come to the rescue?
Go Jay Powell! Go Jay Powell!