Mortgage Credit News by Louis S Barnes - March 12, 2021

Rip the band-aid again: the 10-year T-note today set a new Covid high, trading at 1.63%, up from 1.54% overnight and without any news for propellant. However, still little harm to mortgage rates, strong purchase files with low fees still near 3.25%.
When confronted with a market move as big and sustained as this, everyone wondering how much farther up and what chance of a drop, even temporary... take apart the fearful furball one strand at a time.
Inflation? In the market commentariat, the top cause of this bond market run-up is inflation. The principal problem with this this assertion: there isn’t any. Core CPI rose only 0.1% in February.
Inflationists insist that market signals are flashing red. Market signals are arcane TIPS/10s spreads, swaps market deviations from norm, and the rise in long-term rates itself. These signals have flipped on and off throughout the last 25 years of inflation below Fed target. Their inevitable weakness is circularity: markets put on trades which will protect against future expected inflation.
Other inflators point to commodity prices. But today’s economy is not your dad’s, or even your older brother’s. We don’t use commodities the way we used to. Now we use electrons. The world’s leading commodity consumer, China is soon to run out of self-induced demand -- that’s what happens when your workforce begins to decline by a half-percent per year, and aging overtakes wasteful spending on infrastructure.
Inflation bubblers persist in misinformation, referring to big gains in asset values as “inflation.” Not. Asset bubbles are dangerous but very hard to identify in advance, and have nothing to do with the purchasing power of the currency. Bubbles certainly can be inflated by a central bank keeping interest rates too low, but the common scare story of “too much money-printing” too often leaves out the correspondingly falling velocity of money, a situation into which central banks are supposed to print.
Which reduces the inflation threat to the old reliable:
Overheating? The Fed has at last abandoned too-low unemployment as Enemy Number One. It is still possible for the job market to overheat in the sense of wages rising too far and fast above the rate of productivity gains. Can happen. Please do let someone know if you see wages growing too fast.
An old-fashioned wage-price spiral would require the help of the outside world. If the rest of the world would stop competing with us, if merchants and consumers would stop using IT to discover low-cost providers, if we could halt global trade, if we could keep so many people from growing old at the same time, and get a global baby boom going... then talk about overheating.
But the stimulus! Consider monetary velocity. Most of the stimulus will have temporary effect, and an unknown but large fraction will have no effect at all except to give more money to people who don’t need any. Ditto entire states.
All of that aside, the primary impediment to overheating is:
Covid. We are moving from the realm of the virus to psychology. In the spring of 2020 we had reason to believe in lockdowns as effective suppressants of Covid. If we could be disciplined enough for a few months we might contain Covid and re-open, with slingshot effect on the economy. We were and are too human for lockdowns to have worked, except on islands or with Orwellian surveillance.
Fear of Covid today is deeper than last year. More people fear its long-term presence and threat. Unreasoning fear which leads a jogger to wear a mask in a 20-knot wind with no one within 50 yards, or to wear a mask while driving solo.
Those who are not afraid, or can’t be bothered are not Neandertals. They have different sensibilities, as American as wheat and asphalt.
If anything at the moment, the medics are over-feeding fear, usually with the best intentions. The new CDC Director Rochelle Walensky, is doing far more harm than good. Her latest counterproductive work: no matter how thoroughly vaccinated, stay off airplanes. "Every time there's a surge in travel, we have a surge of cases in this country." A surge in travel by vaccinated people will do that? Prove it.
The two worst problems facing US health care are doctors and patients. Futility: eat your peas, exercise, and lose weight. We’ve heard that. Some behave, some don’t. And patients expect the system to keep us alive forever, heroics unlimited, cost immaterial. Covid is not likely to go to zero, and many people will be fearful and economically stunted for a long time.
Which leaves:
Too many Treasurys for sale. Stick with this one. There is no reason to be long Treasurys, especially long-term ones, because the Treasury is a fountain of new ones. The fundamental reason to buy is the hope of making money if Treasury prices go up (yields down). Boat-missing is a key motivator, but with tens of billions of new ones going by your nose every week, why hurry?
Until the stimulus is funded, and global markets get used to rolling over a hell of a lot more Treasurys than ever before, and we see how all of the inflation/overheating/Covid counterarguments hold up, there is nothing to stop additional rate increases except the Fed fearing economic damage from higher long-term rates, or the fact of damage.
Most credit is short-term. The Fed has short-term money pegged at nothing, and supply is plentiful. Long-term rates have close association with only two sectors, housing and stocks. While conceding a large margin of error in this opinion, 10s could rise to 2.00% and mortgages to 3.75% without particular harm to either sector.
However, however... the steepness of the move since January has to be unsettling at the Fed.

The 10-year T-note in the last year. Today’s trading in red: