Bonds closed Monday modestly stronger. The 10-year Treasury finished at 4.952%, down 4 basis points on the day, and UMBS 6.0 gained 12 cents to 99.81. Lender sheets ended a penny better at 7.19%.
The day was quiet and the range was narrow. Bonds opened stronger on the continued slide in oil, improved through late morning with the 10-year touching 4.951% around midday, gave most of it back by early afternoon near 4.97%, then recovered into the close. Net-net the 10-year moved four basis points and UMBS never strayed far from the 12-to-16 cent gain it established in the first hour. There was no data today and none tomorrow, so the entire session traded on crude and Fed commentary.
The split between the short end and the long end is the part worth watching. The 10-year fell 4 basis points while the 2-year finished slightly higher in yield. That is the market pricing a firmer Fed, not an easier one. Chicago's Goolsbee spent part of the day drawing a line between inflation driven by supply shocks and inflation driven by demand, and indicated he is seeing signs of the second kind. Demand-driven inflation argues for a higher policy rate, not a lower one. Coming one week after the Fed hiked to 3.75-4.00%, the live question is whether another hike follows — not when cuts begin. Lower oil is helping the long end; hawkish Fed talk is anchoring the short end. Both can be true at the same time, and today they were.
For borrowers, the average lender dropped top-tier 30-year quotes by 0.01% today, which puts pricing right back where it sat before last week's hike. Twelve cents of MBS improvement doesn't reprice a rate sheet on its own — lenders generally need 20 to 25 basis points of sustained gain before quotes move meaningfully — but two consecutive sessions without a selloff is the setup that eventually produces one. The 10-year has now tested the 4.94% area without breaking it. That level is the gate; until it gives way, the 7.1-7.2% range is where lender pricing lives. The week stays quiet until Existing Home Sales Thursday and Durable Goods Friday.
— David Burson, NetRate Mortgage