Treasury Yields Plummet as coronavirus Spread Continues
Fears of the potential coronavirus pandemic kept Treasury yields low this week, with the benchmark 10-year note yield dropping to 1.486% in early trading Friday morning. That is the lowest we’ve seen since Jan. 31 and the last time it went below that number was early Sept. 2019. We need to keep a close watch to see if the market closes sub 1.46%. If that happens we will likely see 1.40% very soon. That’s not too far away from the all time low of 1.36% in July 2016. The Federal Reserve Open Market Committee meeting notes released this week refer to the virus as a “new threat” and call it an uncertainty moving forward.
The main threats markets are seeing are potential headwinds against growth. As the virus spreads throughout China, that can greatly affect supply-chains due to workers being in quarantine. TD Securities rate strategist Priya Misra says that fear is starting to truly seep into the minds of investors. “The risk complex has been in this camp that this is transitory and modest and I’d disagree with both.”
However, the Fed members expect the economy to continue to grow at a moderate pace and downplayed any thought of easing rates this year. Markets are already pricing in one or two rate cuts this year but the minutes noted that members feel the economy has strengthened since December. They decided that leaving rates unchanged now “would give the Committee time for a fuller assessment of the ongoing effects on economic activity of last year’s shift to a more accommodative policy stance and would also allow policymakers to accumulate further information bearing on the economic outlook.”
Their stance is not rigid, however, and the minutes indicate a desire to remain flexible should there be any extreme swings with the current spread of the coronavirus or a change in trade relations between the United States and China.
Federal Reserve Vice Chairman Richard Clarida expanded on the committee members’ thinking, saying “What we would be looking for is some body of evidence that suggests that we need to make a material reassessment of our outlook, and certainly we have not done that yet. But we are monitoring, because China is a huge part of our economy.”
Data from the Philadelphia Federal Reserve out this week shows the underlying strength of the U.S. economy is still solid. The Philly Fed measures business activity and just had its strongest reading relative to expectations since 1998. According to the report, 56% of companies expect increased business activity in the next six months with just 10% expecting a decline.
Paired with a strong weekly and four-week average of jobless claims, JPMorgan is now tracking the possibility of a recession happening in the next 12 months to be at a 15-month low. The firm believes that there is a less than one-in-three chance that the economy recedes in the next year. Their belief is that the coronavirus and the grounding of the 737 MAX production will be temporary issues for the manufacturing industry this year. The industry has been buoyed recently by the easing of trade tensions between the United States and China so that will be a factor as the year progresses.
Job Market Conundrum
The latest jobs report from the Bureau of Labor Statistics shows a promising unemployment rate of 3.6% with employment rising by more than 200,000 jobs in Jan. 2020. While those numbers are encouraging and show solid employment, they don’t tell the whole story.
A recent survey from The Manpower Group shows that companies are finding it’s more difficult than ever to find qualified workers. Almost 70% of the companies surveyed reported talent shortages in 2019. And according to the Labor Department, there are about 670,000 more job openings than there are people to fill them.
The main issue for employers, according to the survey, is finding qualified workers for skilled jobs. On the flipside, job seekers say they are looking for more fair pay and better benefits for the work they do which they believe some companies are not providing. Dallas Federal Reserve President Robert Kaplan says, “Productivity growth could be enhanced by policies that help workers impacted by technology and technology-enabled disruption to get reskilled. Dallas Fed economists believe that the emphasis on skills training programs could be dramatically increased in the U.S.”
Fannie and Freddie Targeted in Campaign 2020
Reform of government sponsored enterprises has been a hot topic for President Donald Trump as he makes efforts to push the GSEs out of conservatorship. Now, presidential candidate Mike Bloomberg has revealed his own plan to reform the housing industry and it includes a plan to merge Fannie Mae and Freddie Mac.
Bloomberg wants to work with Congress and regulators to:
- Gradually merge Fannie and Freddie into a single, fully government-owens mortgage guarantor, to ensure that taxpayers are fully compensated for the risks they are assuming–and that lower-income households are well served.
- Have the guarantor transfer downside risk to private investors via specialized securities, retaining just the catastrophic risk that only the government can bear.
Also contained in Bloomberg’s plan is an allowance for community banks “to make mortgage loans to whomever they deem creditworthy.”
The current administration is working to remove Fannie and Freddie from conservatorship before Mark Calabria, the current head of the Federal Housing Finance Authority, sees his term expire.
Making Sense of Housing
Little has changed with mortgage rates this week which means we are still seeing an incredibly low average of 3.49% for a 30-year fixed-rate mortgage according to Freddie Mac. Freddie Mac’s data shows that purchase applications are up 15% year-over-year and residential construction is also surging.
Single-family building permits just hit a 12-year high in January, according to the Commerce Department. Permits rose by 987,000, a 6.4% month-over-month gain, which is its highest level since June 2007. The construction report was so strong that Goldman Sachs added one-tenth of a percentage point to its Q1 gross domestic product estimate.
Construction companies getting back into production mode is extremely important as housing inventory continues to wilt. We have seen seven straight months of decreasing inventory, according to the National Association of Realtors. But the NAR’s chief economist Lawrence Yun says we could see the tide turn as the year progresses because of the increase in construction. “Spring months could still be quite tough for buyers since it takes time to convert housing starts into actual housing completions,” Yun said. “As trade-up buyers move into these newly completed homes in the near future, their existing homes will be released onto the market.”
Existing homes may become even tougher to come by as prices keep going up due to low inventory and consistent demand. Year-over-year, December home prices rose by 4% according to CoreLogic’s Home Price Forecast. And in January, Redfin’s data shows that home prices rose by a whopping 6.7% hitting a median price of $306,400.
January’s inventory fell 11.4% year-over-year, the largest drop in nearly seven years, and with mortgage rates staying so low more people are looking to buy which is increasing demand and leading to a seller’s market.
One place where demand has lessened is in the form of foreign buyers. Chinese buyers are the top purchasers of American real estate, accounting for more than $13 billion in real estate purchases in 2019. That seems like a lot until you compare it to 2018 when Chinese buyers accounted for $30.4 billion in home sales. That number is shrinking even more as the coronavirus takes its toll on the Chinese mainland and China’s economy continues to slow.
Contributed by Greg Richardson, MAXEX Managing Director
Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.