Powell testifies before Congress

Treasury yields end the week flat as Powell testifies before Congress

• Despite moderate intraweek volatility, Treasury yields ended the week primarily unchanged.

Rate rise reignites interest in asset-sensitive hedging strategies

• While rising rate hedging continues to dominate the hedging activity year-to-date, we are observing an increase in asset-sensitive clients endeavoring to protect against a falling interest rate environment.

Mortgage originations fall at U.S. financial institutions

• Mortgage originations have fallen dramatically year-over-year as the Federal Reserve carries out a historic tightening campaign, raising the cost of a new mortgage significantly.

Housing sector improves, manufacturing outlook dims

• Investors reacted to the latest economic releases, including updated figures on the housing and manufacturing industries.

Treasury yields end the week flat as Powell testifies before Congress

• Despite moderate intraweek volatility, Treasury yields ended the week primarily unchanged.
• The Treasury curve inverted further last week, with the two-year yield inching one basis point higher to 4.71%, and the 10-year yield falling three basis points to 3.74%.
• The 2s/10s basis now sits just 11 basis points above the multi-decade low recorded in early March.
• Chair Powell testified before the House and the Senate last week and offered his thoughts on the current state of the U.S. economy and the potential path for monetary policy.
• Like the week prior's post-FOMC press conference, Powell highlighted that the Fed is likely to raise rates at least once and "perhaps twice" but emphasized the speed at which the FOMC delivers the hikes "is not very important now."
• Short-term rates increased notably in the wake of Powell's commentary as Powell indicated that the FOMC "overwhelmingly" believes more rate hikes are needed to bring inflation back to the Fed's 2% average target.
• Market participants currently don't believe the Fed will raise twice.
• Looking at Fed Funds futures pricing on Friday, investors expect the FOMC to raise rates just once in 2023 before kicking off the easing campaign in 2024.

Rate rise reignites interest in asset-sensitive hedging strategies

• As noted previously, liability-sensitive clients protecting against further increases in interest rates have driven most of the hedging activity we have seen cross our balance sheet strategies desk year-to-date.
• Wholesale borrowings and fixed-rate assets have been utilized most heavily in the hedge accounting relationship for these strategies, with a slight edge given to fixed-rate asset hedging via the Portfolio Layer Method.
• While rising rate hedging continues to dominate the hedging activity year-to-date, we are observing an increase in asset-sensitive clients endeavoring to protect against a falling interest rate environment, as the economics of these strategies improved alongside the rise in term rates recently.
• Specifically, the implied initial negative carry has fallen significantly since early May.
• Looking at a three-year SOFR structure, the initial expected negative carry has fallen to 93 basis points on Friday, compared to 166 basis points immediately following the May FOMC meeting.
• Despite the increase in rates since mid-May, borrower hedging activity has continued to rise as banks look to reduce their interest rate risk by offering borrowers floating-rate loans with swaps. Swaps continue to offer borrowers more attractive rates than can be achieved with an unhedged floating-rate loan or traditional fixed-rate pricing.
• As we approach the last day for LIBOR to be published this week, banks have looked to wrap up their lingering conversions to avoid servicing Fallback Rate (SOFR) on their legacy LIBOR loans and swaps.

Mortgage originations fall at U.S. financial institutions

• Mortgage originations have fallen dramatically year-over-year as the Federal Reserve carries out a historic tightening campaign, raising the cost of a new mortgage significantly.
  • According to an analysis conducted by S&P Capital IQ, 19 of the top 20 U.S. financial institutions, ranked by total 1-to-4 family mortgage originations, reported yearly declines in originations, with Wells Fargo, Goldman Sachs, and JPMorgan each reporting over 75% annual drops.
  • Retail and wholesale mortgage originations experienced roughly equivalent declines, falling 60% - 65% yearly.
  • In a bright spot, mortgage delinquencies dropped in the last year by 12.1%.

Housing sector improves, manufacturing outlook dims

• Unlike the week prior, the economic calendar held few high-profile releases, with investors focusing on the housing and manufacturing data released last week.
• Updated figures for housing starts, building permits, and existing home sales improved month-over-month.
• Three of the four measured U.S. regions reported monthly improvements in housing starts which experienced its most significant monthly increase since 2016 and its highest level in 11 months.
• The considerable improvement in housing starts suggested that residential construction may continue to provide support for economic expansion in the coming months.
• The manufacturing industry has been sluggish for months, and the outlook continues to worsen.
• According to the S&P Global U.S. Manufacturing Index, the manufacturing industry remains in contractionary territory after falling below expectations to 46.3, the lowest reading in six months.
• Regional reports also showed weakness, with the Kansas City Fed manufacturing gauge falling below expectations and deeper into contractionary territory.

The look forward

Upcoming economic data releases

• Dallas Fed Manufacturing Activity Index – Monday
• Durable Goods Orders – Tuesday
• New Home Sales – Tuesday
• Conference Board Consumer Confidence Index – Tuesday
• Richmond Fed Manufacturing Index – Tuesday
• MBA Mortgage Applications – Wednesday
• Wholesale Inventories – Wednesday
• Q1 GDP (third estimate) – Thursday
• Jobless Claims – Thursday
• Personal Income / Spending – Friday
• Core PCE – Friday
• MNI Chicago PMI – Friday
• University of Michigan Consumer Sentiment Survey – Friday

Upcoming Federal Reserve Speakers

• Powell – Wednesday
• Powell, Bostic – Thursday

Rates snapshot

Market implied policy path (overnight indexed swap rates)