From my friend Kevin Oakley, I see this news on Twitter:
https://t.co/FTcmvQa2GX👀 @AliWolfEcon @robhahn
The linked article is a longtime mortgage broker Louis Barnes sounding the alarm:
During the last forty-four years, my days have begun and ended with the mortgage market. Four painful moments stand out. Today makes five. (There have been many more good days, but even the Fairy Godmother has her limits.)
Mortgages are covered poorly in financial press, as stocks and such are much more entertaining. Today’s events still unfolding will take days for good coverage. Freddie’s weekly survey will not discover today until next Thursday. But the MBS market is real-time, not like old, sleepy S&L days.
The CPI news this morning was so awful that it changed the bond market’s view of Fed trajectory, and the weakest sector broke. In bond jargon, MBS went “no-bid.” No buyers for MBS. Then a few posted prices beyond borrower demand, not wanting to buy except at penalty prices. Overnight the retail consequence has been a leap from roughly 5.50% to 6.00% for low-fee 30-fixed loans.
I’ve been wondering when this shoe was going to drop. Back in April of 2021, I wrote this post quoting Ray Dalio who pointed out that the economics of investing in bonds has become stupid. You were guaranteed a negative real yield on most bonds, and that was in April of 2021. I thought that was one reason why we were seeing so much capital rotating out of financial assets into real estate.
BlackRock, the villain-du-jour investment fund because of its investments into single family houses among other reasons, wrote about this back in September of 2021 when inflation wasn’t at 8.6%:
Real yields have been pushing more and more negative
10-yr U.S. Treasury yield, inflation, and real yield.
Once again, at current levels, investors who are buying Treasuries now are essentially expected to earn NEGATIVE 1.0% in real yield annually. The economics just don’t make sense.
I’ve long wondered why investors were buying bonds at all, and reasoned that some funds are required by their charters to keep buying bonds no matter what. I guess even they have limits.
Today, the CPI print is 8.6%. Mortgage rates were below 6%, as per Louis Barnes when MBS went to auction and got no-bid, instantly jacking rates up to 6%. Rates are likely headed higher.
If inflation is 8.6% (and most smart people think real inflation is way higher), why would anyone buy MBS paying say 4%, thereby locking in a negative 4.6% yield? If you’re going to accept negative real yield, because you think the Fed is going to crush inflation, then just buy Treasuries which are definitionally zero-risk. Why take on default risk and such with MBS?
The halcyon days of 2020 and 2021 when banks were paying you to borrow money may be coming to an end. Maybe we’ll see real estate become assets again, and the mortgage you took out to buy that real estate go back to being the liability, instead of the other way around as it has been for a couple of years now.
30 year fixed mortgage rates today are about 270bps over the benchmark 10 year Treasury as of this writing (5.85% vs. 3.165%). If we need to get to real bond yields before investors want to buy bonds, that implies a 10 year Treasury somewhere north of 8.6%. That in turn implies mortgage rates north of 11%. (All of that assumes you believe the 8.6% CPI print.)
Consider what that means for the home buying market. Those of us fortunate enough to have 30 year fixed rate mortgages at about 3% are about to see our mortgage “debt” give us better returns than our stock holdings.
Things done changed.