• The UK continues to dominate the trading this week, and this morning the Bank of England said they would temporarily cease their quantitative tightening program and instead turn to temporary quantitative easing, or long bond buying, in order to “restore orderly market conditions.”

 

  • Volatility in both the currency and fixed income markets started after the new government announced a fiscal stimulus plan late last week based around tax cuts and that fueled fears of renewed inflation. The pound dipped to a record low against the dollar and bond yields leapt to cycle highs in dramatic moves that continued this week and that volatility (read selling) leaked into our markets as well.

 

  • As part of the new policy, the Bank of England will delay bond selling in their quantitative tightening program until October 31, while the newly announced long-bond buying program will continue through October 14. The BOE also announced that the monetary policy committee which next meets in November “will not hesitate to change interest rates by as much as needed to return inflation to the 2% target.” That implies the rate hiking program will continue unabated. It appears the hawkish rhetoric is a global phenomenon even when announcing a QE program!

 

  • The actions by the Bank of England have our bond market rallying.  Prior to the announcement, the 10yr had pushed through 4% in overseas trading but the yield has since slipped to 3.82% after the announcement. The 2yr note had a similar reaction with its yield peaking at 4.31% before the BoE announcement then dipping as low as 4.10% and is now trading at 4.14%.

 

  • So far, the Fed speak this week has not deviated from its hawkish tone, nor addressed the increasing signs of global stress. Perhaps the BoE blinking today will provide a catalyst to soften the tone. A total of six speakers will have the opportunity to comment on the BoE’s actions today with Powell leading the way at 10am ET.

 

  • Not that it’s a focus this week, but the busy economic calendar continues. This morning the weekly mortgage applications numbers confirmed the slowdown in real estate.  The mortgage applications index dropped to the lowest level since 1999 with purchase apps down 0.4% and refi apps falling 10.9%. The average 30-yr fixed rate rose from 6.25% to 6.52%, the highest since August 2008. Later this morning we’ll get August pending home sales which are expected to be down slightly from July but down -24.5% from a year ago. The recession in the housing market is in full swing.

Average 30-Year Fixed Rate Mortgage

Source: Bloomberg

 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.00 5.12 5.12 5.17 5.20 5.65
0.50 4.99 5.09 5.06 5.05 5.05 5.54
1.00 4.98 5.06 5.02 5.01 4.97 5.41
2.00 – 5.05 4.97 4.93 4.85 NA
3.00 – – – 4.88 4.78 NA
4.00 – – – – 4.74 NA
5.00 – – – – 4.70 NA
10.00 – – – – – NA

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Published: 09/28/22 Author: Thomas R. Fitzgerald