Inside the Yield Curve

Now, you know, in a number these videos, I talk about stocks and the economy, and I just barely touch on bonds and interest rates. I'd like to go into some more detail today, and to do that, I've asked Jerry Levy from our Mortgage Sales and Trading desk to join me. 

Thank you, Steve. One thing I have to say, I get to be a guest appearance here because for the first time in months, I actually agree with Steve. In terms of the mortgage market, we're sitting at the same six and three-quarters to six and seven-eighths. That's meant that we're basically on hold. On hold is defined as that production in 2025 has now dropped down to where 2024 is. This is the buying season. This is supposed to be where we are at our height, and we are still under 3 billion of agency production a day. In fact, we're finishing up somewhere between 2.6 to 2.8, for the month of April and continuing in May. 

Last week we went down and said for at one point, by the way, we were seeing an under 3% Fed funds rate, by mid-2026. I still think we see the cuts this year. I think we are going to get down to 6% on mortgage rates. But for the next two months, we're in wait and see. 

So you talk about mortgage rates. You jump at that six and three quarters, six and seven-eighths. But how does a 10-year Treasury affect that? What's the outlook there? 

It's a good point because the 10-year is what keys rates. We've heard from Secretary Bessent that they want the 10-year lower. They will do what is needed to make the 10-year lower. If you think of what the new FHA commissioner spoke about, it was about a maga mortgage. The administration would like to have affordability be better for first time homeowners, as well as people who are going to refinance. And to do that, it's keyed off of the 10-year, as you pointed out. 

What could be done to lower 10-year rates? It seems like the easiest path is to issue less treasury securities. In other words, Congress spend less money. 

That would be ideal, Steve. If Congress were to do that, "and we see that, and we're going to get the tax policies that are coming up," that would be great, and you'd see a boost and you'd see the 10-year trading down at 4%. The second part of that equation is how in let's say in the refunding what the Treasury does in terms of yield curve management. In other words, the Treasury decides whether or not to fund in bills or to fund in three years, five years or 10 years. If you issue less 10 years and domestic demand is there, that rate will fall as well. There's been a lot of speculation in terms of, what is the reserve currency? What is the ability of, the traditional international investors as well as domestic, to buy 10-year U.S. Treasury notes? If we look at the mortgage market, for example, broker-dealer balance sheets are back to almost their 2024 highs, meaning that broker-dealers have absorbed the selling from asset managers, from REITs, from international investors. 

But then dealers can only take so much, right? They can only buy so many bonds and hold them on their balance sheet, right?

Right. But what dealers do is dealers are sitting in the middle of the market. They're going to buy when there are sellers, and then they're going to sell when the buyers return. Remember, most of MBS securities are not going internationally. They're taken domestically by banks, by asset managers, by the REITs themselves. The REITs are issuing equity; that's one source of things. But this is about deposit growth. It's about, a secondary part of this is whether or not there's going to be a reregulation, in other words, a lessening of regulations that allows banks to own more treasuries, to own more MBS on their balance sheet and have a less restrictive set aside of capital. All those changes are being considered, and I believe we'll go through with this administration and sooner rather than later. 

So third quarter, first quarter next year, what sort of the time horizon on some of those regulatory changes? 

I think the regulatory change actually, it's in the second quarter. You're going to see that first, the regulatory. Yeah. Asset managers are close to their almost all-time high in terms of over-exposure to MBS relative to other fixed income. So there's a limited amount that the asset management community can come in and now buy. But if you're looking at banks, banks traditionally have been historically have been larger. 

The other point that you haven't even brought up yet is if this were to go where there's difficulty in the market, which again, we're not there, the Fed then does two things. They stop their quantitative tightening. Right. They move back in. And in fact, they're going to do go back towards QE into buying MBS. So those are the two places that that you're going to get support for the market, especially on the on the MBS and Treasury side. 

Well Congress through Dodd-Frank after 2009 of course, created the housing shortage. We're still about 4 million units short nationally and well over a half million short in Texas alone. And that's kept rents higher. It's kept affordability tougher for everybody. So Congress took it away. Congress needs to give it back then. 

Remember, when you talk about what they call the supply issue in terms of housing, this is for first-time buyers. This is affordable housing coming on the market. Units that can go in and that's where the deficit of housing is. A lot of that is also due to regulatory issues, people not being able to build, getting the permitting to be done, the type of labor that is used, the ability to have the materials and be able to get things from purchase to completion. And there's no question that this country is facing a housing shortage. And you see that with the strength in multifamily. If you look at the real estate market right now and you look at anything that's on the other side, whether it's office, warehouse, the thing that's held up the best is multifamily. Because to your point, there is still a housing shortage. There are units that have to come back in, and for those to be created, you need government policy that makes it easier for homebuilders, both on the single family side and then on the multifamily, to be able to get land, to be able to permit it and to be able to get it to market with less in a shorter time period.

Summing up, in terms of housing market, affordability, everything else. Percentage rates are too high. Percentage of regulations too high. Anything else? 

I would say right now you have an administration who has said that their primary goal is housing affordability. They're going to do that from the, interest rate side. They've also said they're going to do it from the programs that the, again, the FHA, which has programs for first-time homebuyers, they're doing it from the offering mortgage side. There's talk about privatization of the agencies, again, trying to find a way to lower costs for homeowners. And then again, on the regulatory side, they're looking to eliminate the restrictions and the regulatory rules that have impeded the ability for the U.S. to create housing.

Fair enough. Well, I think everyone now has a pretty good idea of what the landscape is out there or the playing field, if you will, that we're encountering in this mortgage game. Appreciate the time, Jerry. Thank you, Steve. So, let us know how we can help you; 'til next time.