Friday Wrap: Analysis of News and Events for the Week

10-Year Treasury Note Yield is in Freefall, Dow on Rollercoaster as Virus Spreads

Where do you even begin with a week like this? The volatility in equities due to the fear of the spread of the coronavirus spurred an emergency move by the Federal Reserve, resulting in a historical first-time close below 1% ever for the benchmark 10-year Treasury note. And that was just the first two days. Reality is this trend continued throughout the rest of the week with the 10-year note falling as low as 0.70% intraday early Friday morning.

Here are the most important takeaways from this week:

  • 10-year Treasury note yield drops below 1% for the first time ever
  • Mortgage rates hit all-time low (Freddie Mac 30-year average)
  • Federal Reserve makes emergency rate cut of 50 bps
  • Dow stays in correction due to virus fears and political primaries

Any positive gains this week were quickly erased the following day as the Dow continued on its rollercoaster, swinging by 1,000 points or more in both directions over the first four days. The fear of the spread of the coronavirus continues to be the driving force behind the stock market selloff as California has now declared a state of emergency in reaction to the spread of the virus. The chart below from CNBC shows the dramatic swings we’ve seen over the last week.

The main issue with the spread of the virus is a shift in the global economy which was already struggling before the virus began. Supply chains have been affected and airlines are taking a huge hit as people limit travel. Alaska Air stock plummeted by 11% this week with American Airlines seeing a more than 10% decline.  The Dow Jones Transportation Average hit bear market levels this week as companies like United have started cutting flights in response to weakened travel demand. 

With equities plummeting, investors naturally fled to the relative safety of government bonds. That pushed the yield on the benchmark 10-year Treasury note to its lowest level ever. 

New reports of the spread of the coronavirus on Tuesday sent stocks downward once again with the Dow dropping 800 points. The Federal Reserve stepped in, deciding to ease overnight lending rates by 50 basis points to 1%-1.25%. This was an emergency move made two weeks before the scheduled Federal Open Market Committee meeting. This did little to calm fears as investors continued to buy up 10-year notes, dropping the yield below 1% for the first time ever. On Thursday evening the 10-year yield dropped to 0.846% and traded as low as 0.70% in early Friday morning trading. The chart here from the Wall Street Journal shows just how drastic the drop has been.

Oil and gold were two commodities that have been greatly affected by this week’s volatility. The global benchmark, Brent Crude, dropped by 3.8% to $48.09 per barrel. Brent crude has seen a precipitous fall since the beginning of the year, dropping by 27% overall. OPEC and its allies are meeting this week and initially, as reported by the Wall Street Journal, had agreed to cut one million barrels in production to help balance pricing. Russia does not agree with that standpoint. 

Meanwhile, gold prices rose by 1% as investors put their money in the relative safety of the gold market. SP Angel analyst Sergey Raevskiy believes uncertainy is fueling the gold buying surge, saying, “The market has no understanding of what’s going on. Investors are buying bonds as well as gold as insurance from the deteriorating economic outlook.”

Jobs Report

The labor market seems to have been unscathed so far with the coronavirus scare. The February jobs report from the Labor Department was terrific as unemployment dropped back down to 3.5%. Nonfarm payrolls rose by 273,000 jobs with, no surprise, health care leading the way with 57,000 jobs added. This crushed estimates that predicted the addition of just 175,000 jobs. Also, January and December numbers were both revised up by a total of 85,000. This did little to help the markets as the Dow opened 800 points down Friday morning.

The ADP Moody’s private payroll report this week showed private payrolls increased by 183,000 in the month of February. That’s well above the estimate of 155,000. 

Mark Zandi, chief economist at Moody’s Analytics, said in a statement, “COVID-19 will need to break through the job market firewall if it is to do significant damage to the economy.” He added, “The firewall has some cracks, but judging by the February employment gain it should be strong enough to weather most scenarios.”

Housing Hitting High Notes

Anyone working in the mortgage space saw an incredible amount of rate locks over the last week as mortgage rates dropped significantly along with the 10-year Treasury yield. Year-over-year, the 30-year fixed-rate mortgage average dropped from 4.41% to 3.29% according to Freddie Mac. That is an all-time low for Freddie Mac, which has been keeping these records since 1971. This trend will continue until the market can make some sense of what is going on with the coronavirus. The market needs to find a bottom and we have not seen that yet.

According to data from Black Knight, the drop in rates made 11.1 million Americans “refi eligible.” That means the borrowers have an interest rate at least 0.75% higher than the current rate, have a credit score of 720 or above and have enough equity in their home to get the loan. 

The Mortgage Bankers Association also recorded a sharp increase in weekly refi applications, showing a 26% increase last week. That means year-over-year, refi applications were up 224%. “Given the further drop in Treasury rates this week, we expect refinance activity will increase even more until fears subside and rates stabilize,” said the MBA’s senior vice president and chief economist Mike Fratantoni.

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

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.