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Mortgage Rates Decoded with Matthew Graham · The Ground Game

• 0:03
  SPEAKER_00: Welcome to the Ground Game for mortgage professionals built for the fight.
• 0:09
  SPEAKER_00: Hosted by Brian Lovell and Mark Mylam.
• 0:15
  SPEAKER_02: All right, so welcome to another episode of the Ground Game Podcast.
• 0:18
  SPEAKER_02: As always, I am Brian Lovell here with Mr.
• 0:21
  SPEAKER_02: Mark Mylam, and today we have a special guest joining us.
• 0:24
  SPEAKER_02: Mark, kick us off, man.
• 0:26
  SPEAKER_01: Oh man, we have uh one of my favorite people in this industry to follow and such an important voice.
• 0:31
  SPEAKER_01: Uh, it's Matthew Graham with MBS Live.
• 0:33
  SPEAKER_01: If you are unfamiliar, you need to get familiar.
• 0:36
  SPEAKER_01: If you're not familiar with NBS Live, your capital markets director definitely is I I don't know in my 21-year career, I don't think I've ever had a capital markets director that wasn't a subscriber to MBS Live.
• 0:47
  SPEAKER_01: There's so many different narratives out there right uh right now, you know, and it for originators, it's confusing.
• 0:53
  SPEAKER_01: This has all been a super easy market to understand throughout the pandemic, post-pandemic.
• 0:58
  SPEAKER_01: Throughout the pandemic, we had really low rates because of what the Fed was doing, more business than we could scream at.
• 1:04
  SPEAKER_01: Post-pandemic, we know the Fed went on the fastest hiking spree in 40-something years.
• 1:09
  SPEAKER_01: We know what that was all about.
• 1:10
  SPEAKER_01: Get in try to get inflation under control.
• 1:13
  SPEAKER_01: This year, though, there's just narrative after narrative.
• 1:16
  SPEAKER_01: Is it the national debt?
• 1:17
  SPEAKER_01: Is it inflation?
• 1:19
  SPEAKER_01: Is it labor, resilient labor?
• 1:21
  SPEAKER_01: Is it GDP?
• 1:22
  SPEAKER_01: Is it the war?
• 1:23
  SPEAKER_01: What is it now that you would say, and making it a combination of all these things, but what would you say is number one, this is the primary, you know, thing that's affecting mortgage interest rates?
• 1:34
  SPEAKER_03: Yeah, great question and a central question.
• 1:38
  SPEAKER_03: And to your point, it's definitely a combination of things.
• 1:41
  SPEAKER_03: I don't know that anybody could argue the case that there's just one primary cause.
• 1:48
  SPEAKER_03: Uh, because by the time you do that, then you have the other factors.
• 1:52
  SPEAKER_03: Uh, you know, somebody could jump in and argue those very effectively.
• 1:56
  SPEAKER_03: Uh, so let's talk about the things that we know, the big obvious ones.
• 2:00
  SPEAKER_03: It's really easy to point the finger at inflation, and that is certainly having an impact, but maybe not as big as uh people might think.
• 2:09
  SPEAKER_03: Uh still, it's measurable.
• 2:11
  SPEAKER_03: Uh, we saw a rates spike right when the Iran war started, and it's not the war itself as much as it is fuel prices and other prices of things that are transported by that fuel.
• 2:23
  SPEAKER_03: Uh, but the war also costs money, and we know that it implies additional treasury issuance because the government has to pay for the war either by collecting more taxes or issuing more treasury debt.
• 2:36
  SPEAKER_03: And um that's sort of um, you know, uh an unseen background contributor to higher rates that operates in in the background.
• 2:46
  SPEAKER_03: And did I mention it was in the background?
• 2:48
  SPEAKER_01: Well, what they can keep bringing this up, but uh in today we got the Treasury's the closing out September, right?
• 2:54
  SPEAKER_01: So now we have fiscal 2026 in the books.
• 2:57
  SPEAKER_01: We kind of know what our deficit is.
• 2:59
  SPEAKER_01: Did you see what that final number was?
• 3:00
  SPEAKER_01: I haven't seen it yet.
• 3:02
  SPEAKER_03: Uh no, I it's on my screen behind me, but I don't really care about the the deficit reporting numbers.
• 3:08
  SPEAKER_03: It's it's more about um you know what Treasury issuance is doing and just the general sense that the deficit is going to be increasing simply due to the interest burden.
• 3:19
  SPEAKER_03: Uh so if we took interest on treasuries out of the equation, uh we could actually be making a little bit of progress on the deficit, but with the interest burden added back in there, it uh continues to get bigger and bigger.
• 3:30
  SPEAKER_03: And it's hard to see how that is going to change without some fairly major changes to government spending or taxes, which you know, neither of those th things are going to be popular.
• 3:41
  SPEAKER_03: Um and it it it would take a lot of doing.
• 3:44
  SPEAKER_02: So are you are you saying are you saying then that then the current number is irrelevant?
• 3:48
  SPEAKER_02: It's more about what we do after we know that number.
• 3:52
  SPEAKER_03: Yeah, I mean the current number is a reflection of the past of how we got to where we are today.
• 3:57
  SPEAKER_03: It's more about the balance of of revenue going forward.
• 4:01
  SPEAKER_03: Uh what you know, if if we're spending less, uh including the interest burden than we're taking in, then the bond market's gonna like that.
• 4:11
  SPEAKER_03: Uh nobody expects rapid overnight progress.
• 4:13
  SPEAKER_03: The fact that it's 40 trillion or whatever it is is insignificant compared to the trajectory of the number.
• 4:20
  SPEAKER_03: If we could get a gentle tr a gentle trajectory back toward lower levels, then the bond market would like that.
• 4:26
  SPEAKER_03: And I don't think that the deficit in and of itself accounts for any sort of rapid spike, especially not over the past six months.
• 4:33
  SPEAKER_03: Uh, it is uh an ongoing general contribution to elevated rates and not a sort of um timely reactive source of uh spikes.
• 4:44
  SPEAKER_01: Yeah, it's interesting if you go back seven months ago, and I remember February 27th well, because I was finally getting clients good news.
• 4:52
  SPEAKER_01: I was telling, you know, I was actually refinancing clients and lowering their rate, novel, novel content.
• 4:57
  SPEAKER_01: Novel idea, yeah.
• 4:58
  SPEAKER_03: Yeah, yeah.
• 4:59
  SPEAKER_03: I've never heard of it.
• 5:01
  SPEAKER_01: And so then we hit fast forward seven months into the future, and you know, we're a point and a half higher on interest rates, on mortgage rates.
• 5:10
  SPEAKER_01: Um, and a lot of people would look at that and go, well, what happened on February 28th was we got into a war that created a supply shock, and we know what happened to the price of oil.
• 5:19
  SPEAKER_01: The debt today isn't fundamentally, you know, surprisingly different than the debt was on February 27th.
• 5:25
  SPEAKER_01: Do you how much of this do you think is just the war?
• 5:27
  SPEAKER_01: Uh I know we we talked about other components.
• 5:30
  SPEAKER_01: Do you think the war plays a part, or do you think that's overblown?
• 5:33
  SPEAKER_03: I think the war absolutely plays a part.
• 5:35
  SPEAKER_03: Uh, inflation absolutely plays a part, and that's fairly easy to measure.
• 5:40
  SPEAKER_03: But um, what I think surprised the bond market was the economic resilience during this time.
• 5:47
  SPEAKER_03: It's not as if the higher fuel prices put the brakes on the economy, and a lot of economic data actually improved.
• 5:55
  SPEAKER_03: And uh, we've seen several instances of the bond market reacting rapidly to surprisingly upbeat econ data, even when it comes to dinky little reports like SP's PMI, which you know, we have we have our star rating system on MBS Live uh to sort of convey how important an economic report is, and that one barely gets our lowest star.
• 6:16
  SPEAKER_03: Uh so that one implied the market got crushed one day.
• 6:19
  SPEAKER_01: Yeah.
• 6:20
  SPEAKER_01: Yeah.
• 6:21
  SPEAKER_01: Yeah.
• 6:22
  SPEAKER_01: So, you know, when when you're looking at, I guess you're looking at these combination of factors, and one of the things to me that is interesting is the Fed's role in this, right?
• 6:33
  SPEAKER_01: So much of our careers, we've been conditioned, look at the Fed, watch the Fed, pay attention to what the Fed says.
• 6:38
  SPEAKER_01: Are they hawkish?
• 6:39
  SPEAKER_01: Are they dovish?
• 6:39
  SPEAKER_01: How many hikes are we going to expect?
• 6:41
  SPEAKER_01: How many cuts?
• 6:42
  SPEAKER_01: You know, the Fed's got very limited tools to handle what's happening today.
• 6:48
  SPEAKER_01: Um you know, I I like that they've engaged at least and said, hey, 66 months of inflation running above target is too long, uh, and it certainly has been a long duration.
• 7:00
  SPEAKER_01: Do you think that we should continue to expect and you think it's the right move for the Fed to continue hiking, even though so much of this, whether it's treasury issuance or the war is outside of the Fed's control?
• 7:13
  SPEAKER_03: Well, when all you have is a hammer, everything looks like a nail, and the the Fed's policy rate is the only tool it has to address inflation.
• 7:22
  SPEAKER_03: And so if we put the Fed in charge of price stability, then when prices are too high, all they can really do, uh, or the core of what they can do is change the Fed funds rate accordingly.
• 7:34
  SPEAKER_03: Uh nobody would disagree that a supply, an oil supply shock-driven inflation regime is different than one that's driven by excess demand on the consumer side.
• 7:47
  SPEAKER_03: But uh inflation is inflation, and it would be arguably worse for the Fed not to do anything about it, uh, even though you know the Fed funds rate's not the best tool for the job.
• 7:58
  SPEAKER_03: The best tool to create or fight inflation is fiscal policy.
• 8:02
  SPEAKER_03: But um, that is slower moving and and not necessarily politically popular.
• 8:07
  SPEAKER_03: Right.
• 8:07
  SPEAKER_01: But um it's almost where the election cycle goes to sort of inhibit us from being able to take a meaningful stance on something because you got to get re-elected every four years.
• 8:16
  SPEAKER_01: Yeah.
• 8:17
  SPEAKER_03: Yeah, nobody really wants to see politicians come out and say, hey, we're gonna, you know, be nice to each other and engage in a bipartisan effort to rein in government spending slowly over multiple administrations, and uh, we're gonna jack your taxes up a little bit, but trust us, this will be good for the country in the long run.
• 8:33
  SPEAKER_03: Uh, even though we're gonna be able to do that.
• 8:34
  SPEAKER_01: We're gonna tax social programs while we're at it.
• 8:36
  SPEAKER_01: Yeah.
• 8:36
  SPEAKER_01: Right, right.
• 8:37
  SPEAKER_01: That's it.
• 8:38
  SPEAKER_03: One other thing I wanted to hit on real quick is you know, we have this uh primer on mortgage-backed securities versus treasuries, and one of the analogies that I give is like um a dog owner, we use the term master, I guess, and and a dog on a leash.
• 8:52
  SPEAKER_03: And uh we refer to the treasury market as being the owner and MBS as being the dog, and it can pull ahead or lag behind, but it always generally has to go where the market's going.
• 9:04
  SPEAKER_03: It's a similar the bond Roger Bond market treasuries, it's a similar story with Fed policy.
• 9:09
  SPEAKER_03: You know, people put a lot of stock in what the Fed is thinking or doing or saying, and really the Fed's going to be a dog on a leash, and the the economy is going to be the owner.
• 9:21
  SPEAKER_03: So the Fed Fed policy will always be a reflection in some capacity with with a little bit of wiggle room to be more hawkish or more dovish, a reflection of what the economy's doing.
• 9:31
  SPEAKER_03: Okay.
• 9:32
  SPEAKER_03: So you you're just you're not going to see a hawkish Fed if the economy's in the toilet and inflation is low.
• 9:38
  SPEAKER_03: So why are we so worried about what the Fed's going to do and say, let's think more about what the economy is going to give the Fed in terms of a menu of hawkish and dovish options.
• 9:49
  SPEAKER_03: So the the more that that environment is pointing toward lower rates, the more the Fed's going to have to pick one of those menu options in the lower rate.
• 9:58
  SPEAKER_01: Makes sense, area.
• 9:59
  SPEAKER_01: I'm going to take you for a little further down the economic rabbit hole.
• 10:02
  SPEAKER_01: Um, so when we start looking at the economy, you know, I mean there a lot gets made of a K-shaped economy.
• 10:09
  SPEAKER_01: You know, there's always been the haves, there's always been the have nots.
• 10:12
  SPEAKER_01: Is it a little more pronounced now?
• 10:14
  SPEAKER_01: Perhaps.
• 10:15
  SPEAKER_01: But the the thing that I keep coming back to that is jarring in some way is this year alone, we've set the all-time, second all-time, third all-time low for University of Michigan consumer sentiment.
• 10:29
  SPEAKER_01: Simultaneously, we've hit record highs in the stock market, you know, multiple times.
• 10:33
  SPEAKER_01: I I can't, I've lost count of how many times that's happened.
• 10:36
  SPEAKER_01: And it's fascinating to me that both of these things are happening at the same time.
• 10:40
  SPEAKER_01: GDP was just revised up.
• 10:42
  SPEAKER_01: Jobless claims are sub 200,000.
• 10:44
  SPEAKER_01: We were on this crazy four-week average of jobless claims being really, really low.
• 10:48
  SPEAKER_01: To what do you, I mean, do you attribute this to is truly the K getting more K?
• 10:54
  SPEAKER_01: It's getting more, you know, bigger, or to what do you attribute both of these things happening at the same time?
• 10:59
  SPEAKER_01: Is this AI doing this for the to the stock market?
• 11:02
  SPEAKER_01: And otherwise we wouldn't quite have this level of robust, you know, wealth appreciation in the stock market, or what do you think is going on here?
• 11:09
  SPEAKER_03: Yeah, all fantastic questions, and I'm not uh probably enough of an expert on all of those things that uh the audience should take my response as gospel.
• 11:19
  SPEAKER_03: Um, but there's something to the K-shaped economy thing.
• 11:24
  SPEAKER_03: Uh it could be argued a few different ways.
• 11:27
  SPEAKER_03: Uh, I I see a lot of people sort of quick to push back and say, yeah, for the the bottom quintile of the economy, it it is K-shaped and they're not having a good time.
• 11:36
  SPEAKER_03: Um and then the upper quintile is definitely having the best time, but the the middle 60% is is still uh improving.
• 11:46
  SPEAKER_03: You know, uh the economy is still growing for that middle 60%, incomes are improving, spending's going up, etc.
• 11:52
  SPEAKER_03: So it's not a true K as much as it is uneven growth between uh different income brackets.
• 11:58
  SPEAKER_03: Uh, the stock market and AI is definitely a big part of that.
• 12:02
  SPEAKER_03: Um, you know, uh people talk about concentration of uh stock market gains uh in in a small basket of stocks that surrounds the AI trade.
• 12:12
  SPEAKER_03: But it's also important if you want to do that, if you want to jump on that bad bandwagon, I'd encourage people to look at a heat map of the S P 500 over a year and see that about half the stocks are in positive territory.
• 12:25
  SPEAKER_03: The tech-related stocks are doing much better.
• 12:27
  SPEAKER_03: Um, but it's not quite as stark as some of the commentary would suggest.
• 12:33
  SPEAKER_03: The other thing to keep in mind that we didn't hit on when we were talking about why rates would be higher is the notion of um all of the expense being incurred for the AI build-out and the fact that that's being incurred in the form of debt, and that debt competes with uh other debt for investor attention, and that other debt would be, you know, treasuries, MBS, things like that.
• 12:55
  SPEAKER_03: And uh, you know, the more corporate debt there is to finance the AI build out, the more upward pressure there is on yields uh in and of itself.
• 13:02
  SPEAKER_01: Makes sense.
• 13:03
  SPEAKER_01: That go ahead.
• 13:04
  SPEAKER_02: I was just gonna ask which one of those debts is uh would investors want to invest in more, though.
• 13:11
  SPEAKER_03: Uh it depends on on the kind of investor, and it it also depends on you know the conversations people are having with their financial advisors when they're deciding what index to put their money in.
• 13:21
  SPEAKER_03: Because just, you know, bond index funds are creating a lot of buying and selling pressure uh day in and day out.
• 13:28
  SPEAKER_03: So if uh if you're looking at an index fund that uh is heavily involved in corporate debt, then you know, if that looks attractive to you as a retail investor, then you're gonna be creating demand there.
• 13:41
  SPEAKER_03: But even if we take out uh retail investor preferences, the simple act of issuing corporate bonds creates volatility in the treasury market because the treasury market's intertwined with that in the same way any um you know rate index is intertwined with uh an adjustable rate mortgage, for instance.
• 14:00
  SPEAKER_03: Uh a treasury will be sort of the index for a corporate bond, and corporate bonds are priced with a spread to the uh the treasury that corresponds with the duration of that uh corporate bond.
• 14:13
  SPEAKER_03: So if you have a tranch in that bond offering that's five years, then you look at a five-year treasury to get the index for that particular price.
• 14:21
  SPEAKER_03: And the bookrunners that put these deals together and sell them to the street are oftentimes selling treasuries to uh lock their rate effectively, the same way that a mortgage investor would sell MBS to lock rates.
• 14:35
  SPEAKER_03: So that rate lock selling can create upward pressure in bonds, and then they may or may not buy back that hedge depending on what the market does in the interim.
• 14:43
  SPEAKER_01: That's interesting.
• 14:44
  SPEAKER_01: I did not know half of that.
• 14:46
  SPEAKER_01: Yeah, that's really fascinating.
• 14:48
  SPEAKER_01: They you know what we saw bond auctions, I think it was last week, and had was it was it last week or the week before that we had a good 10-year last week and a and a good 30-year bond auction?
• 14:57
  SPEAKER_03: It seems like Yeah, I mean you yield with when yields go that high, it's a little bit easier to have good auctions.
• 15:03
  SPEAKER_01: But yeah, it's like the cure for higher rates is higher rates.
• 15:06
  SPEAKER_01: Is that the philosophy?
• 15:08
  SPEAKER_03: Um yeah, sorry, I cut you off though.
• 15:09
  SPEAKER_03: Go ahead.
• 15:09
  SPEAKER_01: No, no, that that's kind of where I was going with it.
• 15:11
  SPEAKER_01: Do we feel like at least in the in the here and now, what we look when we look at the market, I I it it gave me this sense of comfort that maybe at least we've sort of found at least temporarily the cap here of how high the the tenure is legitimately going to go because it's drawing in these investment dollars now.
• 15:28
  SPEAKER_01: You get all your principal back and you get to make 5.2, 5.3% per year.
• 15:33
  SPEAKER_01: Do you do you kind of feel that way, at least for the what we know today, that maybe we found our our footing with the tenure?
• 15:39
  SPEAKER_03: Man, I think that is the biggest and most important question that we can be talking about right now.
• 15:44
  SPEAKER_03: And while there's no way to answer it definitively, we can know a few things.
• 15:49
  SPEAKER_03: You know, first off, if we look back at 2023 when the tenure hit five percent for a few minutes, uh that arguably brought in buyers.
• 15:59
  SPEAKER_03: People said, Wow, five percent on a tenure, I'm gonna buy some bonds.
• 16:03
  SPEAKER_03: I bought some bonds.
• 16:04
  SPEAKER_03: Uh, it wasn't necessarily treasuries, but treasuries being where they were was the cue to buy different bonds.
• 16:11
  SPEAKER_03: And um I think we've clearly seen that five percent isn't the magic number this time around.
• 16:17
  SPEAKER_03: And people are wondering, okay, what is the magic number?
• 16:19
  SPEAKER_03: Maybe it's 5.35.
• 16:21
  SPEAKER_03: We've seen a bunch of support there recently.
• 16:24
  SPEAKER_03: Could it be coincidental?
• 16:25
  SPEAKER_03: Sure.
• 16:26
  SPEAKER_03: But last week, uh, it's really hard to make a case for some of the buying that we saw last week without saying that, hey, look, this was organic demand-driven buying among investors that liked the yield that they were seeing.
• 16:38
  SPEAKER_03: Yeah, that in and of itself is not enough to send yields on a on a wild and glorious ride back down, you know, to the mid-fours, because even in 2023, it required a shift in the economic data to get that, you know, more than a hundred-bip rally.
• 16:55
  SPEAKER_03: Um, but if econ data is, you know, ho-hum or weaker, then it would sort of go hand in hand with buyers getting back in the bond market, not wanting to be left out of the appreciation that could be seen in the coming year.
• 17:10
  SPEAKER_03: Uh, and it could take a year, it could take two months, you know, we don't really know how long the rally would take to play out.
• 17:16
  SPEAKER_03: But to whatever extent the shine sort of comes off of the AI trade.
• 17:19
  SPEAKER_03: And if stocks stagnate and uh more sort of, I don't want to use the word AI bubble, but if there's growing concern over some sort of deflation of the AI trade, then that could play into investors reallocating uh out of stocks and into bonds, not altogether, but just adjusting their proportions of how much they have in stocks and bonds, and that could uh provide a meaningful boost.
• 17:44
  SPEAKER_03: Last thing uh as far as factors, just to tag on to this, and sorry for the run-on, but I just want to get it out before I forget to mention it, is the the notion of foreign bond buying demand is a really popular topic, and a lot of people say a lot about it, even if they know very little about it.
• 18:01
  SPEAKER_03: And I'm not the world's foremost expert by any means, but I do know that our trade relationships create a lot of demand for treasuries overseas when we are importing goods from um, you know, overseas trading partners.
• 18:15
  SPEAKER_03: So the more we're importing, the more that we are giving dollars to other countries.
• 18:20
  SPEAKER_03: And then those countries tend to have their central banks buy treasuries with that debt.
• 18:25
  SPEAKER_03: That that pool of bond buying demand has been dwindling, not in a dire way and not in an alarming way, and not in a way that should make anybody talk about de-dollarization of the world or you know, the the dollar's not gonna be the reserve currency anymore, but in a way where we have a meaningful pool of bond buying demand that has gradually been getting smaller.
• 18:46
  SPEAKER_03: And the more onerous that tariffs are, the the more that will continue.
• 18:50
  SPEAKER_03: So that has been another source of gradual pressure um uh for rates.
• 18:56
  SPEAKER_01: That was my next question was what role do you think tariffs have in that?
• 18:59
  SPEAKER_01: Is it is it the primary role?
• 19:00
  SPEAKER_01: Do you think tariffs play that's the primary role of that reduced foreign investment in our treasuries?
• 19:07
  SPEAKER_03: Um I don't know if it's the primary role.
• 19:09
  SPEAKER_03: Uh, you know, it it started to happen even before the the USMCA changes uh in in 2017, maybe it was.
• 19:17
  SPEAKER_03: Um I don't know when that that went through in Trump's first term.
• 19:20
  SPEAKER_03: But uh it it's been leveling off after uh sort of the the post-financial crisis import boom uh started to level off.
• 19:28
  SPEAKER_03: And I I that's the main source of demand uh when it comes to to overseas bond buying.
• 19:34
  SPEAKER_03: You can have other sources as well, but uh I think another thing to consider, really important thing to consider, is that there are some buyers out there that that have some latitude as to what sovereign debt they're going to invest in.
• 19:47
  SPEAKER_03: And as Europe and Japan have seen yields move off the floor, uh uh investors have been able to buy that stuff.
• 19:57
  SPEAKER_03: Whereas for a time, it was really just a treasury game because treasuries were deeply liquid as they always are, and they were much higher in yield than than other uh countries.
• 20:06
  SPEAKER_03: Now, of course, they uh treasuries mean that you're getting dollars.
• 20:11
  SPEAKER_03: So uh a 2% um German bond yield isn't necessarily 2% lower than a 4% treasury yield by the time you account for differences in currency valuations, you know, over that time.
• 20:22
  SPEAKER_03: But there is something to be said for the fact uh that overseas yields have gone high enough that it's not as much of a no-brainer to buy treasuries over other sovereign debt right now.
• 20:33
  SPEAKER_01: So back to the thing about equities and you know what what happens if we do see a little bit of people taking their gains out of the stock market, you know, it almost feels like uh uh not a not a collapse or a crash in the stock market, but a bit of a a reset or a value reset or at least a a slight decline would go a long way towards potentially improving the inflation picture, potentially.
• 20:58
  SPEAKER_01: Uh, you know, a lot of the spending is happening in that in that top quintile that you were talking about.
• 21:03
  SPEAKER_01: And then perhaps uh sort of that that now that the play becomes investing in treasuries, a little bit more of a safe haven investment.
• 21:11
  SPEAKER_01: Do you not that anyone wishes for a stock market, you know, to plateau or even reset a little bit, but do you think that that would be a key element to sort of getting a little bit of rate relief uh eventually downstream and the the dog that's at the end of the leash, which is uh the bond market, the mortgage mortgage rates, mortgage, mortgage backed securities?
• 21:30
  SPEAKER_03: Yeah, but not as much as you might hope.
• 21:33
  SPEAKER_03: I think that uh if there's really if there's one big thing, it's not as much the the level of stock prices as it would be the economy and the general tenor of economic data.
• 21:45
  SPEAKER_03: So uh the bigger benefit would be economic contraction.
• 21:49
  SPEAKER_03: Right.
• 21:49
  SPEAKER_03: Whether that's a recession or just sort of a a a slowdown that makes people talk more about potential recession, doesn't matter as much, but uh the economic data needs to determine.
• 22:00
  SPEAKER_03: deteriorate if we want to see a big rally in the bond market.
• 22:04
  SPEAKER_03: And that has to go hand in hand with inflation getting back to 2%.
• 22:07
  SPEAKER_03: So if we're if we're in a uh uh an economic and inflation regime where uh the Fed can lower rates quite a bit, then longer term rates are going to be able to uh to come down.
• 22:22
  SPEAKER_03: But uh simply having stock prices correct or deflate uh we've already seen that that doesn't always uh correspond to meaningful bond buying it would help yeah you know uh but at the margins it's not it's not the big thing that we need to happen and I hate to say we need a a recession or an economic contraction to happen but that's the fact of life when you're a loan originator is you see your best rates uh on the heels of economic turmoil.
• 22:47
  SPEAKER_01: So it makes what it is yeah um before I we let you go a c a couple other things uh so existing home sales came out today uh sub four million um largely you know I guess borderline recessionary territory for existing home sales which is like 86 87% of all home sales we're now you know four years four consecutive years roughly at that four million level and you know the the no secret to the factor of um you know affordability being the the issue is there anything that you can look out on the horizon and say you know 2027 2028 2029 that we're not going to still be at these sort of recessionary transactional levels or is this sort of baked in for the rest of the decade and really originators need to be preparing themselves for the fact that this is the level of transactions that we're likely to have this is the new normal yeah I wish I knew for sure um uh what I can say is it it uh looking at what rates have done since 2022, uh it makes sense to have seen you know purchase apps and uh and purchase transactions hit a floor and hold sideways there.
• 23:58
  SPEAKER_03: I think we're still in an adjustment phase.
• 24:02
  SPEAKER_03: Um if this were going to be the new normal for rates, you know, and if everybody knew that uh rates would at least hold sideways uh between say you know mortgage rates between six and eight percent and we weren't threatening to go to nine and we weren't you know expecting rates to go below six then uh I think activity could gradually pick up even with rates that high but certainly if rates go down more toward five percent we already saw what that was doing in February you know we saw how things were starting to pick up and it I think the the moral of that story is it doesn't take much after the past four years to uh stimulate activity.
• 24:48
  SPEAKER_01: We don't have to see rates get into the three and four percent range to have a meaningful uptick in in purchase transactions won't necessarily be like it was in 2021 but it would be enough to uh maybe decrease the the phone ringing at the suicide hotline for loan officers I think I have that number on uh we all do right now on on your website on mortgage news daily you guys have a lot of you know great charts and uh it's good historical context if you go in there one of the things I go look at looking at is the mortgage bankers application index in contrast to the 30 year fixed and it does seem right when you get to that mid six range six six and five eight somewhere around there you see applications take off and go north and you can see this right on your site and then as soon as we see interest rates you know mortgage rates go up over and get closer to 7% you start to see them tail off.
• 25:39
  SPEAKER_01: It seems you know based upon me just looking at the the past couple of years six and a half to six and five eighths is kind of the number to to spur you know transaction volume growth.
• 25:50
  SPEAKER_01: Do you do you kind of do you agree with that roughly?
• 25:53
  SPEAKER_03: Yeah and uh it's consistent with feedback from the MBS live community too you know when we talk about rates going lower people aren't clamoring for stuff in the fives necessarily but uh even if it's you know 5.875 or 6.125 people would be thrilled about that and yeah it would definitely make things pick up yeah one tangential point to all that is um you know uh on the on the topic of this being a huge adjustment if we look uh at that chart that you mentioned on uh mortgage news daily long-term interest rates and see how things dipped after the great financial crisis and uh when Fed QE started that began an era not just in the US but around the world of ultra aggressive monetary policy and easing especially uh you know when talk about the rest of the world mainly talking about Europe and that was a really big deal and it created a very big buyer of bonds for a very long time and weaning off of that is a major adjustment and what we're seeing right now in many ways is a reflection of of getting off of the QE era and um if we give that some more time to play out then we may find that the market is maybe more resilient at these rates than we might have been um I don't know conditioned to believe based on the paradigm from 2009 through 2021.
• 27:24
  SPEAKER_03: So you're basically saying we're detoxing absolutely absolutely detoxing and moreover if you look if you find um real yields you could probably find a chart just you know googling real treasury yields online um and also looking at inflation adjusted yields you can see that we have very high real yields relative to the QE era and it's very noticeable when you line that up with dates on the calendar of when QE started and stopped that real yields plummeted when QE started and they rose back up to pre-QE levels fairly quickly when QE stopped and we're in that that detox phase acutely over the past year year and a half.
• 28:07
  SPEAKER_01: Yeah it definitely feels like it um before we let you go I do want to ask you one more question and it's not necessarily a political question but the Treasury Secretary is pretty you know he's he's uh in the spotlight a good bit I saw his response to um Elizabeth Warren this this past weekend but I'm more interested in your take on the Treasury you know their buybacks um you know it it's a liquidity move according to the Treasury Secretary.
• 28:32
  SPEAKER_01: A lot of people are calling it QE light which I don't think it is but but do you I mean do you have a feeling about is is a liquidity move really necessary is what they're doing a necessarily liquidity move that the market is telling us or do you think there is just sort of this trying everything we can try to put a little bit of influence over the long end of the yield curve to get you know long-term rates down?
• 28:56
  SPEAKER_03: Yeah I think um the liquidity thing is a real deal and it was um it was first discussed under Yellen when Yellen was the Treasury Secretary.
• 29:07
  SPEAKER_03: And so it's not some new crazy idea by Besson.
• 29:10
  SPEAKER_03: I will say that the average comment on Besson's comments has been very far off the mark.
• 29:19
  SPEAKER_03: He didn't create the the sell-off and this is not a based on my politics at all.
• 29:24
  SPEAKER_03: It's just based on what the Treasury can do.
• 29:26
  SPEAKER_03: So let's look at it objectively right the the Treasury can't really have a big impact on the the direction of rates.
• 29:37
  SPEAKER_03: They can shift rates around in the yield curve based on how they issue debt.
• 29:43
  SPEAKER_03: So if the Treasury was to say hey we're really just going to issue short-term debt and not much long-term debt then that would flatten the yield curve and you'd see long-term rates come lower relative to short-term rates.
• 29:55
  SPEAKER_03: And I think to some extent you know maybe Besson was thinking about that but um it's not the the buyback thing isn't that big of a deal and the bond market selling that we saw after some of those sort of um maybe verbal uh missteps on Besson's part where he dared the bond market to bet against him or whoever he was daring whether it was currency market or bond market I don't know but um I think a lot of people would say it was actually FX traders uh you know dollar yen stuff but uh it it made for great drama it sounded really interesting but it wasn't really that interesting to the bond market.
• 30:32
  SPEAKER_01: I'm the house now comment thing.
• 30:34
  SPEAKER_02: Yeah yeah yeah makes sense man Matthew thank you so much I I cannot thank you enough for your insights it's uh illuminating to hear you chat about this stuff I hope one day we can have you on the show again anything you want to ask Matthew forward no I I was just the one thing I did I did want to ask is man we saw uh just a quick and sharp increase in rates mortgage rates is that over where we're gonna see some more sideway movement or are there some economic uh re uh data coming out in the next couple of weeks that could cause more of an ascent yeah I mean it's all about data going forward.
• 31:10
  SPEAKER_03: So at when we're recording this on on Tuesday the 13th tomorrow morning we have CPI, the consumer price index.
• 31:18
  SPEAKER_03: And while inflation isn't the only game in town when it comes to rates, if it were to be much higher than expected, then you'll see an adjustment in Fed funds rate expectations and very likely a a fairly sharp reaction in rates.
• 31:32
  SPEAKER_03: It could be enough to push rates back up toward the recent ceiling at which point you know we'd have a chance to see if those value buyers are coming in at 10 year yields of 5.3 plus if inflation is much lower than expected it's really going to add fuel to that fire uh that that theory that we've seen buyers come in and sort of uh create this overhead ceiling for rates and then from there you know uh attention would turn to the next jobs report uh the Fed announcement you know what do they have to say uh uh uh at the end of October and um it it all goes back to what I said earlier about it uh being uh the trajectory of the economy that's going to do more than anything to determine rates and uh inflation is a really important part of that but just just one part.
• 32:16
  SPEAKER_03: But uh yeah definitely looking at CPI, PPI, jobs report those would be the big three those are almost always the big three over the past few years.
• 32:25
  SPEAKER_03: And um yeah wish we knew how they were going to come in ahead of time but uh we'll be finding out with everybody else at 830 a.m for sure so so it could be a continual pretty sharp increase.
• 32:38
  SPEAKER_03: But data dependent which is you know look so some people are saying hey look the the bigger picture rise in in treasuries isn't over yet and uh some people are saying we're about to see a massive bond rally uh nobody that's saying either of those things has any clue yeah or can say why consensus view or can say why yeah Matthew thank you so much appreciate you being on the show and and taking the time out to share your uh your thoughts with us glad to be here thanks for having me guys you bet thanks Matthew