Mortgage Credit News by Louis S Barnes - July 9, 2021

The bond market and interest rates in the last month have been a lesson in humility. The 10-year T-note crested at 1.75%, and since has done something which everyone knew -- absolutely positively -- could not happen. Yields fell. Yesterday to 1.28%.
Some order has been restored today, back to 1.35%, and mortgages had not followed the move down. Nevertheless... Covid recovery has been faster than hoped, inflation quicker and bigger, the Fed wig-wagging a sooner end to stimulus and rate hikes... and long-term yields have fallen by one-third?
Chasing down the “why” in this occasion is a useful excursion into bond market mechanics and thinking, insofar as it does.
Jobs. The direct linkage between inflation and employment has been discredited, but indirect linkage exists and is powerful. A lot of people have gone back to work, but a lot have not -- and a lot of people are still losing jobs.
Every week, markets learn the number of people who have filed new claims for unemployment insurance. That benefit is available only to those whose jobs have been cut, or who have quit for good cause -- Covid, care for a family member -- not because you’re tired of the job. New claims have fallen from the Covid top, but semi-stabilized at double the pre-Covid level of job loss.
Last week’s report of jobs in June did not accelerate in character, its gains heavily among the return of low-wage workers to reopened hospitality, retail, and restaurant work.
One of the better snapshots: the monthly survey of purchasing managers by the ISM. The late-June surveys of manufacturing and the service sector were still strong, but the employment sub-categories weakened to levels barely at breakeven. Services (which include big-pay jobs like IT) fell from 55.3 to 49.3, and manufacturing from 50.9 to 49.9.
Covid. Myopia is a normal affliction of economy-watchers. For the most part in the US, despite vaxxer resistance, Covid is over. Shoot, people are going to the movies. For a year and change, those without masks looked hard-headed; now it’s those with them.
But the rest of the world is still badly disrupted. Europe has caught up with US vaccination, but is still hunkered down. The other, low-vaccine regions are punished by Delta. Immense China still relies on test-and-punish. Sinovac and Sputnik vaccines, NSG.
“Drowning in Liquidity.” During this impossible bond rally there has been an Important Person every day blaming the Fed and other central banks for the market move. We can see a lot of cash in bloated bank deposits and banks turning down new ones, and the extraordinary drop in various credit categories (Helocs, credit cards...). The recent renewal of applications for credit are only a piddling turn from bottom. Just because we have a lot of cash and no plans for it does not mean that we will be silly with it, buying bonds at non-economic prices.
The accusation of “excess liquidity” is usually a big-shot who lost his shirt, and the shirts of clients, trying to blame somebody else for being wrong. Speaking of which...
Short-covering. the 10-year bottomed at 0.55% last August. On the way to 1.75%, you could make a lot of money by shorting bonds. And if you were swimming in your own Kool-Aid, certain of explosive inflation or a tightening Fed, you stayed short and got shorter. But, as the market turned by surprise, you had to begin to buy bonds to cover your losing shorts. Get enough people on the wrong side of any big move, and forced counter-moves reinforce the new move.
Yield Curve. This one is borderline incomprehensible, but what the hell. This is the bond market, after all.
The “yield curve” is the dot-connecting line on a chart plotted on the top-right quadrant of a graph. Interest rates go up the y axis, and maturities go out the x. In normal circumstances, risk expands with time, and rates are higher for long-term IOUs than short-term. Thus a “normal yield curve” starts low on the left -- all the way left at overnight where the Fed operates -- to the far right and 10- and 30-year bonds.
Changes in the shape of the curve are often more useful and predictive than the level. In this move since early June, a stark warning which seldom misses: if long-term rates fall without any change in short-term ones -- an “outside-in” rally -- a powerful signal of economic slowdown ahead. And a signal that the Fed’s announced intentions to tighten in the future are overdone.
Metaphysics. In the miserable alchemy of bonds, often turning gold into lead, a the top is chart theory, known as “technical analysis.” Inside markets, growing vastly with the advent of computers is a diverse mob wearing combination green-eyeshade and propeller hats. “Quants” for math wizards, also weirdos who see the future in patterns of lines on charts of market prices, “momentum” traders looking for the herd and staying with it right to the edge of the cliff and over, and moving-average and RSI people trying to divine the herd’s next move just before it makes it.
None of these people care if there is a Fed, or bonds, or an economy. The most recent God of Bonds, Bill Gross the best trader in for twenty years made his first fortune playing 21 by counting cards until casinos threw him out.
This move, 0.55% to 1.75% and back to 1.28% has “technical” written all over it. “Retracement theory” has several corollaries and branches (Fibonacci, Kondratiev...), but the basic idea is Newtonian. Any big move for any reason will reverse itself partway for any reason or none, and historical charts suggest by one-third.
That’s what has happened here, in a most uncertain situation, just bouncing wockety-tong from one wall to the other.
Next? With apologies to those who read this far, only to find randomness, one non-random thought. The Fed absolutely intends core PCE inflation (a lower-range measure) at a minimum of 2.00% as soon as can be arranged, and will be happy with an overshoot.
Bond yields should be above the rate of inflation, not below. It’s hard to conclude otherwise: the bond market sees global weakness adding to pre-existing deflationary pressures, and doubts the Fed’s ability to generate inflation as high as 2.00%. And the Fed’s blabbing about tapering and rate-hiking are not helping.

The 10-year T-note in the last year, the last two days added in green:

Boulder County CO Health Department current Covid data. As so often, the authorities have fooled with the chart to make it look scarier, in this case by a huge exaggeration of the vertical scale, and removing the year before this May when Covid was trouble. It’s over, now -- except in the low-vaccination teens-20s-30s brackets, 10 cases per week or less is hardly worth reporting.

We have not had a Covid death among the 330,000 of us since Memorial Day. The gold bars have been deaths in long-term care facilities, now the most-vaccinated, although still the most vulnerable: