What I’m Reading
Fuel on the Fire: With long rates rising, investors in the mortgage bond market had to sell treasury positions in order to hedge their holdings, accelerating last week’s bond market selloff. Christopher Maloney of Bloomberg explains what is happening perfectly:
The forced sellers are investors in the $7 trillion mortgage-backed bond market. Their problem is that when Treasury yields — which strongly influence home-loan rates — suddenly rise sharply, many Americans lose interest in refinancing their old mortgages. A reduced stream of refinancings means mortgage-bond investors are left waiting for longer to collect payments on their investments. The longer the wait, the more financial pain they feel as they watch market rates climb higher without being able to take advantage of them.
Their answer: unload the Treasury bonds they hold with long maturities or adjust derivatives positions — a phenomenon known as convexity hedging — to compensate for the unexpected jump in duration on their mortgage portfolios. The extra selling just as the market is already weakening has a history of exacerbating upward moves in Treasury yields — including during major “convexity events” in 1994 and 2003.
Shots Fired: US District Judge John Barker in Texas has ruled that an eviction moratorium put in place by the Centers for Disease Control and Prevention last year and then extended until March is unconstitutional. However, the ruling does not affect states’ eviction moratoriums and will likely be appealed. Globe Street
Defying Gravity: The bond market has been reeling thus far in 2021 from firmer reflation expectations. However, while Treasuries and investment-graded corporates have tumbled, junk bonds, short-term inflation-indexed Treasures, bank loans and floating-rate securities are actually posting modest gains. Capital Spectator
A Bridge to Everywhere: After taking a hit early on in the pandemic, CLOs are back in a big way, especially when compared with longer-term financing:
Roughly $4 billion of collateralized loan obligations were issued through the middle of February, a 46 percent increase over the same period last year, according to JPMorgan research. At the same time, new issues in the market for commercial mortgage-backed securities — another type of debt, where real estate borrowers lock in longer-term financing — were down about 8 percent.
There is currently ample liquidity in the bridge loan space for landlords to reposition properties to prepare their properties for what the world will look like when the pandemic finally subsides. If you are in need of a bridge loan or just want to discuss the current market environment, we should talk. New York Times
Hidden Costs: A new working paper from researchers at Harvard University examined how much households with remote workers spent compared with their peers who commuted to work, prior to the COVID-19 pandemic. The paper found that the amount of money households spent on housing, as a share of overall spending, was more than 7% higher for remote households than for non-remote households who lived in the same commuting zone. “Remote households’ higher housing expenditures arise from larger dwellings (more rooms) and a higher price per room,” the researchers wrote. MarketWatch
Chart of the Day
Forecasting Treasury yield is possibly one of the most fruitless endeavors in which economists engage.
Source: Federal Reserve Bank of Philadelphia
WTF
I Respect the Hustle: A 12-year-old girl is facing criminal charges after purchasing several stun guns online and reselling them to classmates because Florida. The good news is that she clearly earned an ‘A’ in her 6th grade intro to entrepreneurship class (h/t Steve Sims). The Smoking Gun
Follow Your Nose: A pizzeria in Iowa is now offering a pie with Froot Loops as a topping. Still no worse than pineapple, TBH. Des Moines Register
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