Morning Report: The 10 year bond yield breaks the 5% barrier.

Vital Statistics:

Stocks are lower this morning after the 10 year bond yield broke through 5% overnight. Bonds and MBS are down.

The week ahead will have new home sales, Q3 GDP and personal incomes / outlays which contain the PCE inflation index. We don’t have any Fed-speak as we are in the quiet period ahead of next week’s FOMC meeting.

The US government ended the fiscal year with a deficit of $1.7 trillion. That isn’t helping sentiment in the bond market, as rising rates increase the amount of debt the US must sell in order to cover interest payments. This is part of the reason why bonds can’t get out of their own way.

Part of the issue is the “this time is different” mentality in the markets – that the Fed can execute the most dramatic rate hiking cycle in history without triggering a recession.

I suspect we will find that the rules haven’t changed, and we will hit a recession which will be the final nail in this bout of inflation’s coffin.

The relative value of renting versus buying a house has never been more skewed in the favor of renting. The relationship has eclipsed the levels we saw during the residential real estate bubble. The average mortgage payment is 52% higher than the average rent payment.

Going forward, what will bring the relationship back into balance? Falling rates will have to do the job given the scarcity of existing homes for sale. The supply and demand dynamics don’t seem to be there for a bear market in single family homes.

There is a glut of apartment construction however, and many of those projects might have made sense when interest rates were way lower, but won’t now. Apartment cap rates are generally in the mid single-digits and with rates where they are, it will be tough to cover the mortgage along with taxes and maintenance. So I expect to see further pressure on rental rates.

The National Multifamily Housing Council said the apartment market was loose in October. “A combination of rising interest rates and tightening lending standards has caused a decrease in the availability of debt financing for the ninth consecutive quarter,” noted NMHC’s Vice President of Research, Caitlin Sugrue Walter. “Buyers and sellers of apartments, meanwhile, remain unable to agree to terms on pricing, resulting in the sixth consecutive quarter of declining sales volume…Yet, continued softness in the apartment market means that we should expect the shelter component of inflation to come down eventually as well, which could help overall inflation to cool to the Fed’s 2% target and allow the Federal Reserve to start easing policy. Over the longer term, demand for multifamily housing remains strong based on demographic trends and market fundamentals.”

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