Mortgage Credit News by Louis S Barnes - March 5, 2021

It’s especially important this week to keep a firm grasp of your sense of humor. Earnest absurdity requires forgiveness and hearty laughter.
Rates. The 10-year T-note is pushing on 1.60%, and lowest-fee mortgages are scattered 3.25% to 3.50%. Not a catastrophe, these levels about the same as the previous all-time lows in 2012 an 2016. However, the increase will undermine stocks as it continues, each leg up a legit investment as opposed to panic safe-harbor, and with the potential for capital gain when 10s fall next time. Mortgages and housing... a test valid for fifty years, a two-percentage-point rise from recession bottom produces the next recession. 4.50% can do that, just as approaching 5.00% did in late 2018.
Economy. This morning markets got the February job data, a theoretical surge of 349,000 new jobs -- which does not crossfoot with any other job data, all weak. February factoid. See charts below for the real deal on jobs. The implications for housing are big: jobs paying over $60K have increased by 2.5% since pre-Covid, and those paying less than $27K have collapsed by 22.5%. Who buys houses? Any wonder that home prices have done very well?
The twin ISM surveys of purchasing managers in late February are fine: manufacturing at 60.8 is hot, although the far larger service sector slid from 58.7 to 55.3. Note that these surveys reflect change, not level.
The Main Event: Chair Powell, Comedian. Yesterday the chair gave an interview to the WSJ’s top Fed-gun, Nick Tmiraos. I’ve read and watched these since pre-Volcker, and this one was without precedent. The standard for these is a deferential interviewer leaning toward obsequious, but Timiraos yesterday grilled the chair. Polite, but firm, and repeatedly poking at the Fed’s reaction to the jump in long-term rates, and action it might take in response.
At the first poke, the chair dodged. Perfectly normal for a Fed chair. Alan Greenspan could dodge, incomprehensible for hours at a time. Powell: “I would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions.”
Upon re-poke, repeat the first dodge and add this: “I don’t want to be the judge of a particular level of one interest rate.”
Then at re-re-poke, asking about the speed of the rise in long-term rates, “You know, it was something that was notable and caught my attention.”
No kidding, you noticed yields tripling in five months, up a half-percent in two? You noticed that?
A bond trading floor is a cold place. When a Fed chair has said something outrageous, I’ve seen phones (the old kind) and screens thrown in anger. At lesser outrage, derisive laughter. But, there’s another kind of laughter.
In 2018 Russian operatives made an intentionally clumsy effort to murder a turncoat living in the UK. They failed, killed somebody else by accident, and left a trail of nerve agent the length of England. Challenged, Czar Vladimir said the agents were innocent, just sight-seeing in Salisbury. At that fantastic falsehood, a Russian newsie muttered, “vranyo.”
Huh? I googled, then as now, “Cannot be translated into English, no synonym.” I had a Russian acquaintance, a college student moonlighting as a Safeway barista. What is this “vranyo”? He laughed, genuine soft smile, shook his head, struggled, said “Is same as BS, but such elegant and daring BS that we must admire. We laugh at vranyo, but applaud.”
When Powell delivered “...notable and caught my attention...” while refusing any importance or Fed response, I can hear in my mind the braying laughter and approving applause at bond desks. Of course he’s not going to tell us straight that the jump in long rates is pleasing to the Fed and probably intentionally engineered, and instead gives us Putin-quality BS. Vranyo BRAVO!!
A good idea. As painful as the jump has been, and no idea how high the Fed would like to see, engineering a jump in 10s was a good idea. Stocks and housing were overheated, the former bubbling, and with the economy out of immediate crisis the best way to de-bubble is a big jump in long rates. No quarrel. Non-mortgage credit will stay cheap and plentiful. 10s will need to crest 2.00% to push mortgages high enough to hurt housing, and holding short term rates near zero will pull down on the yield of 10s. Borrow at 0.25% and lever bonds 10:1, a huge spread and many masters of the universe will buy bonds that way.
The 2% inflation White Whale. The Fed’s determination to drive inflation up to a sustained 2% is based on this theory: at overall inflation below 2%, some sectors of the economy will enter deflation and risk pulling in the rest. Inflation we know how to fix (throw several million people out of work), but deflation we do not. Once the central bank’s cost of money falls to zero (the “zero bound” in Fed-speak) with deflation still underway, no central bank has yet found a way out of the black hole.
The Eurozone followed Japan into negative interest rates, now with this new effect. A bank analyst has found 237 banks in Germany currently charging negative interest rates on deposits, up from 57 banks pre-Covid. Charges range between 0.4% and 0.6% for deposits anywhere from €25,000 to €100,000 or more.
Deposits have flooded to Germany to be positioned for the ultimate failure of the euro and conversion back to deutschemarks. Now deposits will be forced elsewhere in Europe, but banks still have little demand for loans, and have no assets which earn enough to pay depositors. The whole zone is just rearranging the furniture inside the black hole.
The 2% problem. No central bank has experience with successfully raising the rate of inflation. Our Fed is determined to try. No one at the Fed has addressed the central problem: what will keep long-term rates from increasing beyond Fed wishes and intercepting the increase in inflation? If the answer is Fed manipulation, “twist” and such, “YCC” yield-curve control... we don’t know how that works, either.

Mortgage rate reporting details: Freddie Mac has conducted the longest-running survey of rates (since 1971), and media dutifully report its results every Thursday. But Freddie reports from Jurassic Park. Journalism grads know better than to ask untrustworthy lenders in real time, and never note to the public that Freddie suffers a week of survey-lag, missing all recent moves. This week’s “news” “Mortgages Above 3.00% First Time Since August”... sort of. Actually two weeks ago. Freddie’s antique also assumes that everyone pays fractional points, which few do: yesterday’s “3.02%” included .6% point, thereby understating the rate.

The 10-year T-note in the last year, right back where it was. This last little spike above 1.40%... the vranyo overt acknowledgement by the Fed that it likes the jump. The market has made a few tries at 1.60% and fallen back, so maybe topping -- but at large risk to waning Covid and the pursuit of the White Whale:

The San Francisco Fed published this chart this week, a perfect illustration of Covid damage and not. BTW: except for the Fed enabling part of last year’s stimulus legislation I am in doubt of the actual stimulus impact.

This chart is one of the best visuals ever created, the work of brilliant www.calculatedriskblog.com. This updated one is a perfect illustration of the fraction of the economy still locked out by Covid, and the difference between Covid and a recession: