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MBS Highway - Daily Updates 10/17/2022

Current position: Floating


Stocks and Bonds are both higher to start the day after a volatile last week. Helping Bonds today is news out of the UK that the new Chancellor of the Exchequer (Treasury Secretary) outlines his new plan today which is basically just a backtrack of the unfunded tax cuts. 10 - year Gilt yields are down 35bps to just under 4%, which is a two-week low. As a result, European yields are also falling across the board and in turn, our Bond market is benefiting.


It's rare that Stocks and Bonds consistently fall together and end the year negatively. Since WWII this has happened three times - 1969, 2018, and so far 2022. If the year ended today, it would be the first time in history that both Stocks and Bonds were down over 10% in a year. The following year after this abnormality occurs, 10-year yields were lower. Looking at the year following the past two occurrences - In 1970, the 10 - year declined by 18%, while in 2019 it dropped by 29%.


Splitting the difference between the two, one could infer we could see a 24% decline in the 10 - year next year, which would be a yield under 3% and would support Mortgage Rates around 5%. This coincides with our belief that yields will start to come down towards the end of the year and into next year as peak inflation may very well be in.



Additionally, the move to "safety" in the Bond market may be fueled by some of the recent headlines of the Financial Times and Wall Street Journal, which included: Global Economic Warning Lights are Flashing Red, Risks of a Deeper Global Slump Escalate, and Recession Now Seen as More Likely. Adding to that, the IMF stated that across many economies, recession risks are rising, and the worst is yet to come. And as we have explained, during a recession rates drop, as there is a flight to safety in the Bond market. An interesting stat on recession from David Rosenberg - The average post - WWII recession lasts 10 months, and the stock market typically bottoms 60% -70% of the way through it, which means any bottom will occur no later than next Spring.


The October NY Manufacturing Index, fell to -9.1 from -1.5, which was more than twice as bad as expected. It's also the 3rd straight month below zero and the 5th month in the past 6. This is another sign of a slowdown and recession coming.

Overnight St. Louis Fed President, James Bullard, said that he is voting for 75bp hikes at the November 2 and December 14 meetings.


And speaking of the Fed, Atlanta Fed President, Raphael Bostic, is being investigated for making trades after the blackout period. He claims the violations were not intentional and occurred because of his reliance on a third-party manager who was handling his investments. He also incorrectly reported assets. Many are skeptical of Bostic's claimed ignorance as he is very savvy on the financial markets and it would appear unlikely that he was unaware of his own personal finances. This is the 3rd Fed member with questionable practices – Kaplan, Rosengren, and now Bostic. It raises the question if there was a conflict - of interest in ending their Bond buying, even as inflation was rising.


It's a housing-centric week, with the NAHB Housing Market Index, Housing Starts and Permits, and Existing Home Sales all due for release.


Mortgage Bonds are trading in a wide range between the low from October 13 and overhead resistance at 99.54. The 10 - year is also in a very wide range and has moved lower to 3.93%. Because Bonds are in such wide ranges they are susceptible to big price swings, so we have to remain on guard. Begin the day week Floating.


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