In a climate of uncertainty and potential volatility, recent developments have triggered promising signs of a turnaround in the bond market. A preliminary agreement to raise the debt ceiling reached between President Biden and House Speaker Kevin McCarthy has lifted some pressure. At the same time, home price appreciation indicates a resilient housing sector, with Treasury issuance set to increase and important job data releases on the horizon.
Biden-McCarthy Agreement to Raise Debt Ceiling
In a noteworthy move that could affect the bond markets positively, President Biden and House Speaker Kevin McCarthy have reached a tentative agreement to raise the debt ceiling. While not a done deal, the agreement, which includes some spending caps, may eliminate worries over the debt ceiling for a few years if approved. This news offers relief as the debt ceiling issue has been an overbearing concern.
Predicted Increase in Treasury Issuance
The proposed deal would require spending upwards of $700 billion, potentially reaching $750 billion, leading to concerns about offsetting this deficit. As a result, more issuance of Treasuries is anticipated. Interestingly, most of these Treasuries are expected to be issued at the lower range, focusing on two-year bills. Although the issuance of Treasuries can drain liquidity, the fallout may be better than initially feared.
However, this agreement is flexible. The good news is that mortgage-backed securities respond favorably to the prospect of a deal, suggesting a possible turnaround.
Encouraging Trends in Home Price Appreciation
In more positive news, the March Case Shiller home price index indicates an upturn in the housing sector. Although behind two months, the index shows home prices rose by 0.4% in March. Year-over-year, they have increased by 0.6%. Even though these numbers have decreased slightly due to challenging comparisons with the substantial gains seen last year, they are still positive. Since the peak in June 2022, home prices have only declined by 2.3%.
Optimistic Projections from the Federal Housing Finance Agency (FHFA)
The Federal Housing Finance Agency (FHFA), which excludes cash buyers and focuses on single-family homes with conforming loan amounts, reported even better numbers. In March, home prices rose by 0.6% and by 3.6% on a year-over-year basis. Since June 2022, home prices have increased by 0.7%, according to the FHFA.
Anticipated Trends in Home Price Appreciation
We anticipate this positive trend to continue. Our projections suggest home price appreciation between 5% and 6% nationwide this year. However, there might be a short period where the year-over-year number will turn negative due to comparisons with the peak. Despite this, we expect a positive trend for the remainder of the year.
Focus Shifts to the Jobs Market
Finally, attention will turn to the jobs market this week. The ADP job report is expected to show 170,000 job creations, while the BLS job report is forecasted to report 193,000. Although we need a negative job number for the betterment of mortgage-backed securities, the current trend seems promising.
This week promises to be influential for the bond market, with the ADP and BLS reports scheduled for release. The bond market will follow the positive trends in other areas.
