Bonds sell off as countries seek tariff deals – The Daily Tearsheet

Vital Statistics:

Stocks are lower this morning as increased tariffs kick in. Bonds and MBS are down.

It looks like the rally in bonds in the early days of the stock market sell-off was just a flight to safety trade. Now that stocks are stabilizing we are seeing that money flow out of bonds. It sounds like investors are “selling duration” which means they are selling long-term bonds and putting the money in cash or cash equivalents. In addition, hedge funds are almost certainly de-leveraging, which will put pressure on risk assets.

This effect will almost certainly play out in mortgage backed securities at least in the short term. Any sort of pain will also potentially affect non-QM as well.

Team Trump’s phone is supposedly ringing off the hook from countries eager to cut a deal on tariffs. In order to calm down the markets and get control of the situation, he needs to take yes for an answer and announce some deals. If this goes on much further, Congress is going to lose patience and pass legislation to take back control of tariffs (which is should do as a matter of general principles).

What is the Fed to do? The Fed has to be worried about how this is impacting the daily functioning of markets. There are all sorts of indicators that only someone who spends their day in front of a Bloomberg terminal will notice, but if the functioning of repo markets, F/X derivatives or other markets begins to sputter, the Fed will be forced to act. I expect the first move would be an end to quantitative tightening, but rate cuts could be on the table.

Trump’s tariffs are an exogenous shock to they system, similar to Brexit, COVID and the 2008 financial crisis. The Fed’s typical playbook is to flood the system with liquidity and deal with any inflationary fallout later.

By the way, we will get the FOMC minutes from the March meeting later today. Seems like something from another time.

Home prices rose 4.7% YOY according to the Clear Capital Home Data Index, a repeat-sales home price index that focuses on price per square foot. The Northeast performed the best on a YoY basis, increasing 7.2% YoY and 0.2% QoQ. The top Northeast metropolitan statistical area (MSA) was the New York City metro area where prices rose 1.3% QoQ and 8.4% YoY. Rochester, NY rose 0.8% QoQ and 11.2% YoY, and Providence rose 1.1% QoQ and 9.1% YoY. No Northeast MSAs hit the bottom 15. 

The Midwest was the next best performing region on a year-over-year basis, where prices rose 0.2% month-over-month and 6.5% year-over-year. Cincinnati was the top Midwestern MSA where prices rose 1.6% QoQ and 7.6% YoY. Columbus, OH was next at 1.4% QoQ and 6.6% YoY. Interestingly, Dayton, OH was one of the worst performers in the Midwest on a QoQ basis where prices fell 0.6% QoQ but rose 6.8% YoY. Minneapolis also struggled where prices fell 0.6% QoQ and rose 3.3% YoY. 

The West was the third best performing region, where prices rose 0.3% QoQ and 3.8% YoY. The best performing MSA was San Jose, CA where prices rose 1.7% QoQ and 6.5% YoY. The Los Angeles MSA was the next best performer where prices rose 1.2% QoQ and 6.2% YoY. Las Vegas was third, where prices rose 1.2% QoQ and 6.2% YoY. The worst Western MSA was Sacramento, CA where prices fell 0.7% QoQ and increased 1.6% YoY. 

The South was the worst-performing MSA where prices fell 0.3% QoQ and rose 2.7% YoY. Richmond, VA was the top performer in the South, where prices rose 2.1% QoQ and 7.0% YoY. Charlotte, NC was the next best area, where prices rose 0.9% QoQ and 3.1% YoY. The worst-performing MSA was Tampa, FL where prices fell 1.9% QoQ and 2.2% YoY. Memphis, TN also struggled, where prices fell 1.2% QoQ and 0.1% YoY. 

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Mortgage applications rose 20% last week as purchases increased 9% and refis rose 35%.