THE STOCK MARKET
The Fed liquidity suck is also reflected by the collapse in margin debt.
In dollar terms, the U.S. equity market (stocks) erased nearly $16 Trillion of market cap from the peak, worse than the Great Financial Crisis (GFC).
Which conjures up the fear of “what if 2008/09 hit again” in percentage terms …
Will we escape the 2009 echo plunge again?
At least so far, the decline in market cap as a percentage of GDP is not nearly as bad as the GFC, but still down nearly 50% from its peak.
Margin debt has also collapsed.
Despite the “risk-off” sentiment of 2022, which is usually bond bullish, the S&P 500 reached all-time highs relative to bonds.
Which brings us to the bond market and mortgage rates.
BONDS AND MORTGAGE RATES
With stocks taking a beating, you would think it would be time for bonds to shine, but so far this has been the worst year for…
The 10-year Treasury, since 1788.
One of the four worst years for global bonds going back to 1721.
This has been the longest (over 26 months) and the deepest (-16%) drawdown for the US Aggregate Bond Index.
The pain and punishment has been relentless, with long-duration US Bonds losing money more than 73% of the weeks in 2022, a new record.
For some context, Oct 22 was the 12th straight week of yields on the 10-year increasing, surpassing a record held since the bond rout of 1984.
The liquidity theme has played out in the bond market as well.
The Bloomberg Liquidity Index shows how liquidity in the bond market has decreased to levels similar to 2020 when the bond market had almost died.
Volatility in the bond market is measured by the MOVE Index (Bond Market Option Volatility Estimate).
The correlation between liquidity and volatility is clear to see – as the Fed sucked, previously low volatility become unstuck, and as a result the bond market was fu…
When the Treasury markets can’t find a bid, neither do mortgage bonds.
Most mortgage rates in the US are derived from the yield on correlating mortgage bonds.
Mortgage bonds normally follow the path of US Government Bonds within a tight spread, mortgage bonds slightly higher in yield/rates.
In times of stress (and illiquidity) the spread between the two widens.
The spread between 30-year mortgage rates and US Treasury Bonds hit a record high this year.
With rising US Treasury Bond yields (lower prices) and the widening spreads, the average 30-year fixed rate mortgage rate, based on a Freddie Mac lender survey, crossed 7% for the first time in two decades.
As a result of decaying conditions in the bond market and the resulting higher rates, demand for mortgages (from consumers) has plummeted to the lowest level in 25 years.
The lack of demand isn’t only a REFINANCE story.
The number of weekly mortgage PURCHASE applications has reached the lowest levels since the 2009 housing crisis.
The year-over-year change in purchase applications is also the lowest on record.
In total, mortgage activity is down 86% year-over-year, even with lending standards remaining loose.
Despite the bloodbath in bonds, there is still hope, as markets usually revert to the mean.
Mortgage rates returning to their MEAN trendline would suggest roughly 3.5% 30-year mortgages.
This brings us to yield curves, which I will cover in PART 4.
FINANCIAL MARKETS 2022 YEAR IN REVIEW
PART 1 | PART 2 | PART 3 | PART 4 | PART 5
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