Market Insights Recap — Week of July 7, 2025

Hi, I'm Jerry Levy, Managing Director of Texas Capital's Mortgage Securities Sales & Trading. 

We're at the halfway point for 2025 now, and it's worth taking the pulse of the market. Tariff policy will either escalate or deescalate as the July 9 deadline has been moved for many to August 1st. Only the UK, Israel and Vietnam have framework deals. India, Indonesia and Japan are expected to be completed, as well as Canada and the EU trading block, who are all reportedly close to an agreement.

Yield-wise, we are 18 basis points wider on 2s from pre-nonfarm payrolls from last week at 3.88% and 16 basis points wider on the 10-year at 4.38%s, but that 10-year yield is basically in the middle of the 52-week range of 3.62% and the 4.80%s. Fed-wise two Fed cuts are expected and priced in for 2025 starting in October, not July anymore, rather than the three that were almost fully priced in before Friday's payroll number, which came in a little bit stronger than expected. Personally, I'm still going to go with the slowdown. I believe it has begun and I do think we're going to get three cuts for the balance of 2025. Going back to that payroll number, 74,000 jobs were created actually in education. These are jobs that went to local government states, and that was unexpected. And that offset the anemic private payroll job creation, which was close to the year-to-date lows, basically flat.

This week we'll see the Fed minutes, and people are looking at that to see was the Fed divided, how was it divided and any clues to the future. Certainly President Trump is going to look at this and may call again for rate cuts or to name Chairman Powell's successor months earlier than usual, which would create some kind of situation where you have almost like a shadow Fed Chairman. And that would be unsettling to markets. 

Thirty-year mortgage rates remain in the 6.75-7% range, which is having a dual effect. It's slowing down home buying, as well as pushing refi activity to the latter part of 2025, when rates are lower. There are many frustrated 6.75-7.5%, mortgage owners who bought in the last 18 to 24 months and were hoping to refi at 6% or lower. Lower existing home activity and lower refi activity is beginning to weigh on agency supply, which, in our estimation, is 20% to 30% lower than expected for this time of year. Remember, we are at the peak homebuying season, so this should be at peak production for agency issuance. MBS buying has continued, which has pushed the bond basis, how we are relative to the market, down to 142 basis points and close to the March lows as the relative scarcity of MBS is pushing up pricing. 

Buying slowdown is having an effect on existing home inventory and leading to a buyer-friendly, if not an outright buyer's market, in Florida, Colorado, North Carolina, Hawaii and here in Texas. For example, there are now three Texas cities where home inventory for sale is now 50% above the pre-pandemic levels. So that's 2017 to 2019. Austin is 69% higher, San Antonio 58% and Dallas 56%. Not surprisingly, home price appreciation was reported at -0.4% in April, and it's now forecast to be flat for 2025 after rising 4% last year in 2024. While these are encouraging trends for affordability, taxes and insurance costs continue to increase, and the main drivers of affordability, the 30-year mortgage rate and household income, they're still subject to these policy implementation and macro events for the balance of 25 that we've alluded to here. 

Encouragingly, Secretary Bessent and the Fed are behind the Supplemental Leverage Ratio (SLR) reform that we spoke of last time, where banks are going to be able to free up their existing bank capital to support larger investments in U.S. Treasuries and Ginnie Securities. The estimates of the proposed changes will allow banks to add between 5 to 6 trillion of U.S. treasuries. It will also enhance liquidity in the market for U.S. Treasuries, as broker-dealers will then be able to hold more inventory of Treasuries. Secretary Bessent has pledged to limit issuance of 10-year and 30-year Treasuries to support the long end of the market and drive down rates. The goal here is to get the 10-year to that three and three quarter to 4%, which would give us a 6% or lower 30-year rate by the end of 2025.

It will be an interesting second half of 2025. I'm looking forward to it.