Blitzkrieg Bop! US Mortgage Rate Fall As Economic Barbell Stresses US Rates (Treasury Volatility Curve Sends Disturbing Message)

US home buyers are benefitting from European economic misery (particularly Germany and fiscal-stressed Italy). I call this the Blitzkrieg Bop.

On the other side of the interest rate barbell is China (and Japan). So while the USA is growing, Germany and Japan are not doing so well, causing their Central Banks to push rates to zero .,.. or lower. Even China’s Central Bank is buying everything in sight in fear of a recession.

Hence, US mortgage lenders and potential homebuyers benefit is terms of dropping interest rates.

You can see the downward plunge in the Treasury Volatility Curve (MOVE – TYVIX) as Central Banks become active in 2008 and 2009. The 30-year mortgage rate has been declining thanks to hyper-intrusion of global central banks, killing off bond volatility.

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Allegedly, The Federal Reserve is ceasing its raising of their target rate and will stop shrinking their balance sheet in September.

Mortgage purchase applications (NSA) are in their third phase and doing quite nicely, helped along recently by the barbell slowdowns overseas.

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Global Supply Of Negative Yield Bonds Hits $10 TRILLION (Europe’s Sweet 16 Of Negative Yielding Sovereign Debt)

To listen to some talking heads, everything is beautiful.

But according to the bond market, everything is not beautiful. In fact, there is concern about global economic growth and financial fragility.

There is now $10 trillion in negative yielding bonds in the global economy.

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And in Europe, there are 16 nations with negatiive 2-year sovereign yields, including Germany and France.

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Notice that the short-end of the yield curves in Europe and Japan are negative.

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People get ready for negative Central Bank rates in the USA!

Rollercoaster! Global Economic Growth (G10, US, Emerging) Sliding Down Together

The global economy is in a rollercoaster pattern.

And unfortunately the G10, US and Emerging nations are on the downward side.

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This might explain Larry Kudlow’s call for a 50 bps drop in the Fed Funds Target Rate. At least Trump’s nominee for The Fed’s Board of Governors was previously the President of the Kansas City Federal Reserve. And CEO of Godfathers Pizza! Conditional on the US Senate approving his appointment, “Welcome to the party, pal!”

 

 

Mortgage Investors Cool on Swaps as Rush for Duration Ends

Investors in mortgage-backed securities are cooling on swaps used to hedge against falling interest rates, signaling confidence that yields may have found their bottom.

The 10-year swap spread has backed off from the tightest level since October 2017, reached last week. The U.S. Treasury 10-year yield had touched a 15-month low of 2.37 percent on March 27.

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A U.S. homeowner may prepay their mortgage at will, and the duration of a mortgage-backed security can drop dramatically during periods of falling yields due to the potential for faster prepayments. This means MBS investors need to add duration, referred to as “convexity hedging,” as interest rates drop.

A popular method to add duration is by using swaps and “the 10-year is still the most liquid swap for mortgage hedgers,” said Walt Schmidt, head of mortgage strategies at FTN Financial. Now that the 10-year yield has risen again to the 2.50 percent area, swap spreads are back close to where they lay previous to the rally and “the wave of convexity hedging is likely over for now,” he said.

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Duration:  the weighted average maturity of the security’s cash flows, where the present values of the cash flow serve as the weights. The greater the duration of a security, the greater its percentage price volatility.

The Overnight Indexed Swap (OIS) looks like an ARCTANGENT function.

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Slippin’ Jimmy took this photo of Fed Chair Jerome Powell’s chair.

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S&P 500 e-mini Futures On The Rise Again As China Signals Growth (UST 10Y-3M Curve Turns Positive Again!)

China signalled positive manufacturing growth and the market react positvely.
(Bloomberg) — Stocks strengthened worldwide as strong manufacturing data out of the world’s second largest economy (China) helped ease investor worries about a slowdown in global growth. Treasuries extended losses after as a gauge of U.S. factories topped estimates in March.
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The S&P 500, Dow and Nasdaq were all in the green. Shares of Lyft dropped below its IPO price as analysts noted there is limited visibility into the company’s path to growth and profitability. The Stoxx Europe 600 Index climbed on the heels of its best quarter in four years after key China manufacturing PMIs for March beat the highest estimate in Bloomberg surveys of economists. That’s despite manufacturing data for Europe coming in at the lowest since 2013, which briefly caused the euro to pare some of its gains.
E-mini S&P 500 futures are on the rise … again!
 

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And the 10 year – 3 month yield curve turned positive!

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Remain Calm! VIX-MOVE Spread Separates As Fed Rate Cut Predicted

Welcome to the topsy-turvy world of financial markets!

The S&P 500 Cboe Volatility (Equity) index versus the Merrill Lynch 1-month Treasury bill index (MOVE) show a further separation.

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This comes as the WIRP Estimated Number of Moves Priced in for the US (Futures Model) is indicating one rate cut coming up (although Trump’s economist Larry Kudlow wants 50 points in cuts as does Trump’s nominee for The Federal Reserve Board of Governors, Stephen Moore.

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Despite Kudlow and Moore touting 50 basis point cuts (and a slowing advanced retail spending report for February) …

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Remain calm .. all is well!

 

“The Sag” In The US Sovereign And Dollar Swaps Curve Continues, But Germany, UK And Japan Curves Are Sagging Too!

It’s the same all over the world.

The US Treasury actives curve and dollar swaps curves are markedly sagged (or kinked).

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But other countries are experiencing curve sags as well, but just not as pronounced. Germany, Japan, UK and France are all sagging, but less notably.

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Numerous risks abound in the global economy such as Brexit, China trade disagreement, etc.

On the other hand, there is Venezuela which has entered a seemingly permanent sag.

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And the SAG award goes to … the USA for short-term SAG.

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The permanent SAG award goes to …. Nicolas Maduro and Venezuela.

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Evidence That Europe Is Slippin’ Into Darkness: 10Y German Sovereign Yields Lower Than Japan’s 10Y Sovereign Yields

Europe is slippin’ into darkness.

Evidence? 10-year German sovereign yields are lower than the major global low-yield leader, Japan.

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Of course, the European Central Bank is doubling down on its failed monetary policy.

Treasury Yield Curves Inverts Even More As Treasury Volatility Spikes (Leveraged VIX Volume Highest In History)

The US Treasury yield curved inverted on Friday for the first time since 2007 and it became ever more inverted today as 10-year T-Note Volatility spiked.

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Investors are taking large bets on the leveraged VIX note with inflows the highest in recorded history (that is, since 2011).

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Former Fed Chair Janet Yellen said not to worry. Inversion may simply be a rate cut signal, not recession. So don’t think twice, it’s alright.

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Inverted US Treasury Yield Curve: Signal Of Impending Recession Or The Fed Raising Its Target Rate Too Quickly?

The US Treasury Yield Curve inverted on Friday for the first time since 2007. The talking heads were stumbling and mumbling about its meaning.

Here is my explanation. It is a combination of an overzealous Federal Reserve AND a slowing US (and European) economy.

In short, The Federal Reserve has been raising its target rate relatively quickly (driving the 3-month Treasury bill yield up) as the 10-year Treasury note yield has been falling (particularly since November 2018). They met on Friday and passed each other. This view of the inverted Treasury yield curve is more about The Fed raising its target rate despite a declining 10-year yield.

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But another interpretation of the inverted curve is it is signal of an impending recession, the same way that household net worth (as a percentage of disposable personal income) peaks then falls prior to a recession (a tip of the hat to Jesse’s Cafe Americain!)

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So, it is really a combination of the two: an overzealous Fed and a slowing global economy