Thursday, June 21, 2018
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US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
6/14/18	1.81	1.94	2.07	2.35	2.59	2.69	2.81	2.90	2.94	2.99	3.05
6/15/18	1.82	1.94	2.07	2.35	2.55	2.68	2.81	2.89	2.93	2.98	3.05
6/18/18	1.84	1.94	2.13	2.35	2.56	2.67	2.80	2.89	2.92	2.98	3.05
6/19/18	1.85	1.94	2.13	2.34	2.54	2.64	2.77	2.84	2.89	2.95	3.02
6/20/18	1.85	1.94	2.14	2.36	2.56	2.67	2.80	2.89	2.93	2.99	3.06

                                                                                      Source: U.S. Department of the Treasury, as of 06/20/2018 

 
Home Prices Miss as Mortgage Rates Increase
 
This morning’s FHFA House Price Purchase Index missed expectations showing only a 0.1% increase m/m (+6.4% y/y) for the April vs 0.5% expected.  The monthly data is volatile; however, looking at the y/y (Graph 1) prices look to be losing steam as mortgage rates have been increasing.  Home purchase prices have been steadily rising since 2014; however, the slowdown in price gains have year to date has caused prices to drop out of the channel trend observed the last few years. 
 

 
It is no surprise that higher interest rates may be the cause of the slowdown in home prices as higher financing limit buyers’ ability to chase higher home prices.  Since April when this FHFA Home Price data was surveyed, 30 year mortgage rates have steadied but yet to reflect the latest rate hike by the Fed.  Mortgage rate increases seem to lag the last few rate hikes by about a month looking at the Bankrate 30yr Mortgage Rates (Graph 2).  The higher financing rates will limit buyers’ even further in how much house they can purchase. 
 
Graph 2: Bankrate 30 Year Mortgage Rates

Source: Bloomberg 6/21/2018.
 
Home sales are still quite robust; however, there are signs like this slowdown in home prices and decreased building permits showing stress in the market place.  Without further wage increases to help maintain the growth in the housing market, we could be looking at a turn that may be a drag and/or slow the economy. 
 
Strategy: Look to diversify your assets.  As banks have been increasing loans to deposits, bond investments have been put to the side even though rates are near the highest they have been in recent years.  If the economy does turn, it is better to take advantage of these higher yields now on high quality bonds that provide cash flow, like a 15yr 3% MBS that still yields 3.00%+ with a WAL of ~4 years (ask your salesperson about MBS Pool FN 890625).

                             

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

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